LeBron James LBJ Corporation agrees on January 1 2017 to lea

LeBron James (LBJ) Corporation agrees on January 1, 2017, to lease equipment from Cavaliers, Inc. for 3 years. The lease calls for annual lease payments of $26,000 at the beginning of each year. The lease does not transfer ownership, nor does it contain a bargain purchase option, and is not a specialized asset. In addition, the useful life of the equipment is 10 years, and the present value of the lease payments is less than 90% of the fair value of the equipment. Prepare LBJ\'s journal entries on January 1, 2017 (commencement of the operating lease), and on December 31, 2017. Assume the implicit rate used by the lessor is unknown, and LBJ\'s incremental borrowing rate is 6%. (credit account titles are automatically indented when the amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to O decimal places, e.g. 5,275.) Click here to view the factor table. Date Account Titles and Explanation Debit Credit 1/1/17 Right-of-Use Asset 73668.21 73668.21 Lease Liability To record lease liability) |Lease Expense 1/1/17 26000.00 Lease Liability 26000.00 To record lease payment) 12/31/17 Lease Liability 26000.00 Cash 420.09 Right-of-Use Asset 21579.91

Solution

Step 1: Calculation of PV of Lease Rental

Step 2: Amortization table

Step 3: Journal Entry

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Year	Lease Payment	PV Factor@ 6%	Present value
0	$              26,000	$ 1.00000	$     26,000
1	$              26,000	$ 0.94340	$     24,528
2	$              26,000	$ 0.89000	$     23,140
	PV of Lease Rental	73,668