Question

LeBron James (LBJ) Corporation agrees on January 1, 2017, to lease equipment from Cavaliers, Inc. for 3 years. The lease calls for annual lease payments of $18,000 at the beginning of each year. The lease does not transfer ownership, nor does it contain a bargain purchase option, and is not a specialized asset. In addition, the useful life of the equipment is 10 years, and the present value of the lease payments is less than 90% of the fair value of the equipment. Prepare LBJ’s journal entries on January 1, 2017 (commencement of the operating lease), and on December 31, 2017. Assume the implicit rate used by the lessor is unknown, and LBJ’s incremental borrowing rate is 4%.

Answer 1

			Lease Liability on January 1, 2017=Present Value of AnnualLease payments discounted at 4%
			Annual Interest =4%	0.04
			Number of Leae payments in 3 years	3
			Annual payment	$18,000
			Lease Liability on January 1	$51,950	(using PV function of excelwith Rate=0.04. Nper=3, Pmt=-18000,Type=1(Payment at beginning of period)
	No.	Date
	1	.Jan.1,2017	Right of use of assets	$51,950
			Lease Payable		$51,950
	2	.Jan.1,2017	Lease Payable	$18,000
			Cash		$18,000
	3	.December.31,2017	Lease Payable	$16,642
			Interest expense	$1,358		(51950-18000)*0.04
			Cash		$18,000