Answer:
the journal entry to record the signing of the lease agreement:
December 31, 2019, lease agreement signed
- Dr Right of use 493,506
- Cr Lease liability 493,506
the lease liability must record the present value of the 10 annual lease payments: $68,099 and 8% discount rate:
present value of an annuity due = payment + {payment x [1 - (1 + r)⁻⁽ⁿ⁻¹⁾]/r}
- payment = 68,099
- r = 8%
- n - 1 = 10 - 1 = 9
PV annuity due = 68,099 + {68,099 x [1 - (1 + 0.08)⁹]/0.08} = 68,099 + 425,407 = $493,506
the journal entries to record the annual lease payments:
December 31, 2019, annual lease payment
- Dr Lease liability 68,099
- Cr Cash 68,099
December 31, 2020, annual lease payment
- Dr Lease liability 34,066
- Dr Interest expense 34,033
- Cr Cash 68,099
interest expense = ($493,506 - $68,099) x 8% = $34,033
December 31, 2020, depreciation expense
- Dr Depreciation expense - leased building 49,351
- Cr Accumulated depreciation - leased building 49,351
December 31, 2021, annual lease payment
- Dr Lease liability 31,307
- Dr Interest expense 36,792
- Cr Cash 68,099
interest expense = ($425,407 - $34,066) x 8% = $31,307
December 31, 2021, depreciation expense
- Dr Depreciation expense - leased building 49,351
- Cr Accumulated depreciation - leased building 49,351
