Question

JJ Corporation agrees on January 1, 2017, to lease equipment from Alpha, Inc. for 4 years. The lease calls for annual lease payments of $31,000 at the beginning of each year. The lease does not transfer ownership, contain a bargain-purchase option, and is not a specialized asset. In addition, the useful life of the equipment is 12 years, and the present value of the lease payments is less than 90% of the fair value of the equipment. Prepare JJ’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 JJ’s incremental borrowing rate is 5%. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275.)

Answer 1

J.E in the books of JJ
Date	Account Description	Debit	Credit
1-Jan-17	Right-to-Use Assets	115,421
	Lease Obligation		115,421
	(Being Lease Recorded)
1-Jan-17	Lease Obligation	31,000
	Cash		31,000
	(Being Payment Made)
31-Jan-17	Lease Expenses	31,000
	Right to Use Assets		26,779.00
	Lease Obligation		4,221.00
	(being Lease Expenses recorded)

Year	Lease Rental	PV Factor@ 5%	Present value
0	31,000	1	31,000
1	31,000	0.95238	29,524
2	31,000	0.90703	28,118
3	31,000	0.86384	26,779
4	-	0.8227	-
PV of Lease Rental			115,421

Amortization Table
Year	Lease Rental	Accreation	Lease Obligation	Amortization
0	31,000	-	84,421	-
1	31,000	4,221.00	57,642	26,779.00
2	31,000	2,882.00	29,524	28,118.00
3	31,000	1,476.00	-	29,524.00
4	-	-	-	31,000.00

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