Question

For all the following lease transactions, if Illini needs to depreciate the leased equipment, use "depreciation expense." If the lease classification is operating lease, use "rental expense" for all related expenses. Illini leases equipment from Cubs Corporation under a four-year lease agreement on 1/1/20x1. The lease specifies annual payments of $36,000 on each 1/1 and beginning 1/1/20x1. The annual lease payment includes a yearly $1,000 maintenance fee paid to Cubs for providing relevant maintenance services on the equipment. Illini has the option to buy the equipment at the end of the lease term (i.e., 12/31/20x4) for $20,000 when the fair value of the equipment is expected to be $60,000. The expected useful life of the equipment is five years with no residual value. The implicit rate is 10%. Please refer to the instructions and the table in this question. Enter the correct journal entry for part [A].

Date	Account Name (Debit)	Account Name (Credit)	Debit	Credit
1/1/20X1	ROU assets		[A]
		Lease obligation		[B]
1/1/20X1	Lease obligation		[C]
	Prepaid maintenance		[D]
		Cash		[E]
12/31/20X1	Maintenance expense		[F]
		Prepaid maintenance		[G]
12/31/20X1	Interest expense		[H]
		Accrued interest		[I]
12/31/20X1	Depreciation expense		[J]
		ROU assets		[K]
1/1/20X2	Lease obligation		[L]
	Accrued interest		[M]
	Prepaid maintenance		[N]
		Cash		[O]
12/31/20X2	Maintenance expense		[P]
		Prepaid maintenance		[Q]
12/31/20X2	Interest expense		[R]
		Accrued interest		[S]
12/31/20X2	Depreciation expense		[T]
		ROU assets		[U]

Answer 1