LeBron Jarmes LBJ Corporation agrees on January 1 2017 to le

LeBron Jarmes (LBJ) Corporation agrees on January 1, 2017, to lease equipment from Cavaliers, Inc. for 3 years. The lease calls for annual lease payments of $16,000 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 7%. (Credit account titles are automatically indented when the amount is entered. Do not indentnanually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places, e.g. 5,275.) Date Account Titles and Explanation Debit Credit 1/1/17 . Leased Asset Lease Liability (To record lease liability 1/117 Lease Expense 16000 Cash 16000 To record lease payment) 2/31/17 Deprecation Expense Accumulated Depreciation-Capital Leases

Solution

Present Value of lease liability = Annual lease payment*PVAF(7%, 3 yrs) (in the beginning)

= $16,000*2.80802 = $44,928

  Journal Entries (Amounts in $)

Date	Account Titles and Explanation	Debit	Credit
1/1/17	Right-of-Use Asset	44,928
	Lease Liability		44,928
	(To record lease liability)
1/1/17	Lease Liability	16,000
	Cash		16,000
	(To record lease payment)
12/31/17	Lease Expense	16,000
	Lease Liability [($44,928-$16,000)*7%]		2,025
	Right-of-Use Asset ($16,000-$2,025)		13,975