Question

Accounting for Leases
On January 3, 2017, Hanna Corporation signed a lease on a machine for its manufacturing operation. The lease requires Hanna to make six annual lease payments of $18,000 with the first payment due December 31, 2017. Hanna could have financed the machine by borrowing the purchase price at an interest rate of 5%.

a. Prepare the journal entries that Hanna Corporation would make on January 3 and December 31, 2017, to record this lease assuming its i. an operating lease and ii. a capital lease.

Round answers to the nearest whole number. If no entry is required, select "No entry" from the drop-down answer options for the debit and credit entries.

i. the lease is reported as an operating lease.

General Journal
Date	Description	Debit	Credit
Jan. 3	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	To record inception of lease
Dec. 31	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	To record depreciation expense.
Dec. 31	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	To record payment on lease.

ii. the lease is reported as a capital lease.

General Journal
Date	Description	Debit	Credit
Jan. 3	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	To record inception of lease
Dec. 31	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	To record depreciation expense.
Dec. 31	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	Cash	Answer	Answer
	To record payment on lease.

b. Assuming that the lease is treated as a capital lease, post the journal entries of part a to the appropriate T-accounts.

Cash
	Answer	Answer

Lease Liability
	Answer	Answer

Leased Asset
	Answer	Answer

Accumulated Depreciation
	Answer	Answer

Interest Expense
	Answer	Answer

Depreciation Expense
	Answer	Answer

c. Show how the entries posted in part b would affect the financial statements using the financial statement effects template. Use negative signs with answers, when appropriate.

Balance Sheet Transaction Cash Asset + Noncash Assets - Contra Asset = Liabilities + Contrib. Capital + Earned Capital 1. Signed a capital lease. $Answer + $Answer - $Answer = $Answer + $Answer + $Answer 2. Depreciation on leased asset. Answer + Answer - Answer = Answer + Answer + Answer 3. Made annual lease payment Answer + Answer - Answer = Answer + Answer + Answer

Income Statement Revenue - Expenses = Net Income $Answer - $Answer = $Answer Answer - Answer = Answer Answer - Answer = Answer

Answer 1

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1 Operating Lease
Date	Account	Debit	Credit
Jan 3	No Entry
Dec 31	No Entry
Dec 31	Lease Expense	18000
	Cash		18000
	To record depreciation expense.
2. Finance Lease
Jan 3	Leased Asset	91362		18000*PVF 5%,6 Period i.e. 5.075692
	Lease Liabilitiy		91362
Dec 31	Depreciation Expense	15227
	Accumulated Dep		15227	91362/5
Dec 31	Lease Liability	13432
	Interest Expense	4568		91362*5%
	Cash		18000
b T Account
	Cash
			13432	Lease Liability
			4568	Interest Expense
	Lease Liability
	Cash	13432	91362	Lease Asset
	Leased Asset
	Lease Liabilitiy	91362
	Accumulated Dep
			15227	Depreciation Expense
	Interest Expense
	Cash	4568
	Depreciaton Expense
	Accumulated Dep	15227

c.		Cash Asset	Non Cash	Contra	Liabilities	Cont Capital	Earned Capital	Revenue	Expense	Net Income
	Signed Lease		91362		91362
	Dep			15227					15227
	Lease payment	-18000			-13432				4568