Concept explainers
Lessee a nd lessor; operating lease
• LO15–4
On January 1, 2018, Nath-Langstrom Services, Inc. a computer software training firm, leased several computers under a two-year operating lease agreement from ComputerWorld Leasing, which routinely finances equipment for other firms at an annual interest rate of 4%. The contract calls for four rent payments of $10,000 each, payable semiannually on June 30 and December 31 each year. The computers were acquired by ComputerWorld at a cost of $90,000 and were expected to have a useful life of five years with no residual value. Both firms record amortization and
Required:
Prepare the appropriate entries for both (a) the lessee and (b) the lessor from the beginning of the lease through the end of 2018.
(a)
Operating lease
This type of lease refers to the lease where the lessor permits the lessee to make use of the asset for a specified time period by charging rent without actual transfer of ownership of the asset which is leased. This type of lease cancellable and is of short term.
To prepare: appropriate entries for NLS Incorporation (Lessee) from the beginning of lease through end of 2018.
Explanation of Solution
Prepare journal entry for NLS Incorporation in the month of January 1, 2018
Date | Accounts title and explanation | Post Ref. | Debit ($) |
Credit ($) |
|
Right-of-use asset (1) | 38,077 | ||||
Lease Payable | 38,077 | ||||
(To record the lease payable) |
Table (1)
Explanation:
- Right-of-use asset is an asset. There is an increase in asset. Therefore, debit right-of-use asset account by $38,077.
- Lease payable is a liability. There is an increase in liability. Therefore, credit lease liability by $38,077.
Transaction on June 30, 2018: Record the lease payments and interest expense.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Interest expenses (2) | 762 | |||
Lease payable (Difference) | 9,238 | |||
Cash | 10,000 | |||
(To record semi-annual lease payment and interest expenses.) |
Table (2)
Explanation:
- Interest expense decreases stockholders’ equity. Therefore, debit interest expense by $762.
- Lease payable is a liability. There is a decrease in liability. Therefore, debit lease liability by $9,238.
- Cash is an asset. There is a decrease in asset. Therefore, credit cash account by $10,000.
Transaction on June 30, 2018: Record the amortization expense.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Amortization expense (3) | 9,238 | |||
Right-of-use asset | 9,238 | |||
(To record amortization expense.) |
Table (3)
Explanation:
- Amortization expense decreases stockholders’ equity. Therefore, debit amortization expense by $9,238.
- Right-of-use asset is an asset. There is a decrease in asset. Therefore, credit right-of-use asset by $9,238.
In case of operating lease, the lessee would record interest expense and then “plug” the right-of-use asset amortization at the amount which is needed to make the total interest plus amortization amount equal to straight line lease payments made. A single lease expense would be recorded in the income statement of the lessee.
Transaction on December 31, 2018: Record the lease payments and interest expense.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Interest expenses (4) | 577 | |||
Lease payable (Difference) | 9,423 | |||
Cash | 10,000 | |||
(To record semi-annual lease payment and interest expenses.) |
Table (4)
Explanation:
- Interest expense decreases stockholders’ equity. Therefore, debit interest expense by $577.
- Lease payable is a liability. There is a decrease in liability. Therefore, debit lease liability by $9,423.
- Cash is an asset. There is a decrease in asset. Therefore, credit cash account by $10,000.
Transaction on December 31, 2018: Record the amortization expense.
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) |
Amortization expense (5) | 9,423 | |||
Right-of-use asset | 9,423 | |||
(To record amortization expense.) |
Table (5)
Explanation:
- Amortization expense decreases stockholders’ equity. Therefore, debit amortization expense by $9,423.
- Right-of-use asset is an asset. There is a decrease in asset. Therefore, credit right-of-use asset by $9,423.
In case of operating lease, the lessee would record interest expense and then “plug” the right-of-use asset amortization at the amount which is needed to make the total interest plus amortization amount equal to straight line lease payments made. A single lease expense would be recorded in the income statement of the lessee.
Working notes:
The number of years is taken as 4 periods
Use the present value factor 3.80773 (Present value factor $1 for 4 periods at 2% rate) for calculating present value of lease payments.
Calculate the present value of lease payments as follows:
Calculate the amount of interest expense for June 30, 2018 as follows:
Calculate the amortization expense for June 30, 2018 as follows:
Calculate the amount of interest expense for December 31, 2018 as follows:
Calculate the amortization expense for December 31, 2018 as follows:
(b)
To prepare: appropriate entries for CW leasing (Lessor) from the beginning of lease through end of 2018.
Explanation of Solution
Prepare journal entry for CW leasing in the month of January 1, 2018
No entry is needed
Transaction on June 30, 2018: Record the lease revenue.
Date | Accounts title and explanation | Post Ref. | Debit ($) |
Credit ($) |
|
Cash | 10,000 | ||||
Lease revenue | 10,000 | ||||
(Record the lease revenue) |
Table (6)
Explanation:
- Cash is an asset. There is an increase in asset. Therefore, credit cash account by $10,000.
- Lease revenue increases stockholders’ equity. Therefore, credit lease revenue by $10,000.
Transaction on June 30, 2018: Record the depreciation expense.
Date | Accounts title and explanation | Post Ref. | Debit ($) |
Credit ($) |
|
Depreciation expense (5) | 9,000 | ||||
Accumulated depreciation | 9,000 | ||||
(Record the depreciation expense) |
Table (7)
Explanation:
- Depreciation expenses decreases stockholders’ equity. Therefore, debit depreciation expense by $9,000.
- Accumulated depreciation is a contra asset and increases by $9,000. Therefore, credit accumulated depreciation by $9,000.
Transaction on December 31, 2018: Record the lease revenue.
Date | Accounts title and explanation | Post Ref. | Debit ($) |
Credit ($) |
|
Cash | 10,000 | ||||
Lease revenue | 10,000 | ||||
(Record the lease revenue) |
Table (8)
Explanation:
- Cash is an asset. There is an increase in asset. Therefore, credit cash account by $10,000.
- Lease revenue increases stockholders’ equity. Therefore, credit lease revenue by $10,000.
Transaction on December 31, 2018: Record the depreciation expense.
Date | Accounts title and explanation | Post Ref. | Debit ($) |
Credit ($) |
|
Depreciation expense (6) | 9,000 | ||||
Accumulated depreciation | 9,000 | ||||
(Record the depreciation expense) |
Table (9)
Explanation:
- Depreciation expenses decreases stockholders’ equity. Therefore, debit depreciation expense by $9,000.
- Accumulated depreciation is a contra asset and increases by $9,000. Therefore, credit accumulated depreciation by $9,000.
Working notes:
Calculate the depreciation expense for June 30, 2018 as follows:
Calculate the depreciation expense for December 31, 2018 as follows:
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