On January 1, 2021, Robertson Construction leased several items of equipment under a two-year operating lease agreement from Jamison Leasing, which routinely finances equipment for other firms at an annual interest rate of 4%. The contract calls for four rent payments of $40,000 each, payable semiannually on June 30 and December 31 each year. The equipment was acquired by Jamison Leasing at a cost of $360,000 and was expected to have a useful life of five years with no residual value. Both firms record amortization and depreciation semi-annually. Required: Prepare the appropriate journal entries for the lessee from the beginning of the lease through the end of 2021.

Journal Entry

Explanation:

The Journal Entry is shown below:-

Annual interest rate = 4% (Semi annual is 2%)

Lease period = 2 years (4 semi annual lease terms)

Present value of periodic lease payment = Lease payment × PVAF (r,n)

= $40,000 × PVAF (2%,4)

= $40,000 × 3.8077

= $152,308

1. Right of use asset Dr,     $152,308

            To Lease payable              $152,308

(Being Beginning of lease is recorded)

2. Interest expenses Dr,     $3,046

(2% × ($152,308 - 0))

   Lease payable Dr,          $36,954

             To cash                                $40,000

(Being lease and interest payment is recorded)

3. Amortization expense Dr,      $36,954

($40,000 - $3,046)

            To right of use assets               $36,954

(Being amortization on the right to use of assets is recorded)

4. Interest expense Dr,                 $2,307

(($152,308 - $36,954) × 2%)

Lease payable Dr,                        $37,693

          To Cash                                         $40,000

(Being lease and interest payment is recorded)

5.  Amortization expense Dr,      $37,693

($40,000 - $2,307)

         To right of use assets                   $37,693

(Being amortization on the right use assets is recorded)

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