Question

On January 1, Lorraine, Inc., entered into a lease contract. The lease contract was a ten-year lease for a computer with $16,000 annual lease payments due at the end of each year. Lorraine took possession of the computer on January 1. The present value of the lease payments under the lease contract is $117,761. Prepare the journal entry for this lease on January 1

Answer 1

Answer:

Right of Use Asset - Computer $117,761 (debit)

Lease Liability$117,761 (credit)

Explanation:

The Lease period is more than 12 months, thus this type of lease is called finance lease.

Lorraine, Inc must recognise the Right of Use of the Computer and the Lease Liability at the inception of the lease.

The lease liability is measured at the Present Value of lease payments of $117,761. Right of Use Asset is measured at the Fair Value of Lease Liability of $117,761.