Forrest, Inc. has entered an agreement to lease an old warehouse with a useful life of 5 years and a fair value of $20,000 from United Corporation. The agreement stipulates the following. Rental payments of $4,638 are to be made at the start of each year of the 5-year lease. No residual value is expected at the end of the lease. Forrest must reimburse United each year for any real estate taxes incurred for the year. Last year, the cost of real estate taxes was $700, though these costs vary from year to year. Forrest must make a payment of $500 with the rental payment each period to cover the insurance United has on the warehouse. Forrest paid legal fees of $1,000 in executing the lease. Assuming Forrest's incremental borrowing rate is 8% and the rate implicit in the lease is unknown, prepare the journal entry to record the initial lease liability and right-of-use asset for Forrest.

Question

Forrest, Inc. has entered an agreement to lease an old warehouse with a useful life of 5 years and a fair value of $20,000 from United Corporation. The agreement stipulates the following.

  • Rental payments of $4,638 are to be made at the start of each year of the 5-year lease. No residual value is expected at the end of the lease.
  • Forrest must reimburse United each year for any real estate taxes incurred for the year. Last year, the cost of real estate taxes was $700, though these costs vary from year to year.
  • Forrest must make a payment of $500 with the rental payment each period to cover the insurance United has on the warehouse.
  • Forrest paid legal fees of $1,000 in executing the lease.

Assuming Forrest's incremental borrowing rate is 8% and the rate implicit in the lease is unknown, prepare the journal entry to record the initial lease liability and right-of-use asset for Forrest.

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