Question

On January 1, 2019, Mitchell Company leases equipment from Donelson Corp. for the equipment's entire useful life of six years. Danelson acquired the asset for $239,826 and normally utilizes an 5% interest rate for these types of transactions. The annual lease payment is $45,000, and the first payment is made at the inception of the lease. Donelson should record which of the following in connection with the second payment?
1. Debit to interest expense of 11,991.
2. Credit to interest revenue of 11,991.
3. Debit to lease payable of $35,259.
4. Credit to lease receivable of $35,259.

Answer 1

Answer:

d. Credit to lease receivable of $35,259

Explanation:

Date    General Journal                Debit     Credit

           Cash                                 $45,000  

                 Lease receivable                      $35,259

                 ($45000 - $9741)

                Interest expense                       $9,741

                [($239826-$45000)*5%]