Chapter 14, Problem 11BPSB

To determine

Concept Introduction:

The lease agreements are commonly of two types-

Financial lease agreement and

Operating lease agreement.

Financial lease agreement is a lease agreement or a way of providing finance. In this type of lease legal owner is the finance company for the duration of the lease and on the other hand lessee has operating control as well as substantial share of risk and return.

Requirement 1:

We have to determine the journal entry at the inception of lease.

Answer to Problem 11BPSB

Date	Particulars	Amount ($)	Amount($)
January 1	Lease asset- Equipment	39000
	Lease Liability		39000
	( to record asset or liability at the inception of lease)

Explanation of Solution

At the inception of finance lease the lease asset account will get debited and lease liability account will get credited with the amount of annual lease payment.

To determine

Concept Introduction:

The lease agreements are commonly of two types-

Financial lease agreement and

Operating lease agreement.

Financial lease agreement is a lease agreement or a way of providing finance . In this type of lease legal owner is the finance company for the duration of the lease and on the other hand lessee has operating control as well as substantial share of risk and return.

Requirement 2:

We have to determine the journal entry at the time of cash payment.

Answer to Problem 11BPSB

Date	Particulars	Amount ($)	Amount($)
January 1	Lease expense	14000
	Cash		14000
	( to record lease rent payment)

Explanation of Solution

At the time of finance lease cash payment lease expense account will get debited and cash account will get credited with the amount of cash payment.

To determine

Concept Introduction:

The lease agreements are commonly of two types-

Financial lease agreement and

Operating lease agreement.

Financial lease agreement is a lease agreement or a way of providing finance. In this type of lease legal owner is the finance company for the duration of the lease and on the other hand lessee has operating control as well as substantial share of risk and return.

Requirement 3:

We have to determine the journal entry for the amortization of asset.

Answer to Problem 11BPSB

Date	Particulars	Amount ($)	Amount($)
Year 1	Depreciation (Reduction of gross asset)	13000
	Depreciation expense		13000
	( to record asset depreciation)
Year 2	Depreciation (Reduction of gross asset)	13000
	Depreciation expense		13000
	( to record asset depreciation)
Year 3	Depreciation (Reduction of gross asset)	13000
	Depreciation expense		13000
	( to record asset depreciation)

Explanation of Solution

At the time of recording depreciation or amortization, depreciation(reduction of gross asset) account will get debited and depreciation expense account will get credited with the amount of depreciation.

Amount of depreciation is calculated by dividing 39000 by 3 i.e. value of five year lease payment divided by lease life.

To determine

Concept Introduction:

The lease agreements are commonly of two types-

Financial lease agreement and

Operating lease agreement.

Financial lease agreement is a lease agreement or a way of providing finance. In this type of lease legal owner is the finance company for the duration of the lease and on the other hand lessee has operating control as well as substantial share of risk and return.

Requirement 4:

We have to determine the journal entry at the time of cash lease payment at the end of year 1 and year 2.

Answer to Problem 11BPSB

Date	Particulars	Amount ($)	Amount($)
Year 1	Lease Liability	14000
	Interest	1975
	Cash		15975
	( to record lease rental payment)
Year 2	Lease Liability	14000
	Interest	1025
	Cash		15025
	( to record lease rental payment)

Explanation of Solution

At the time of lease rental payment at the end of year one, lease liability account and interest expense account will get debited with their respective amount and cash account will get credited with the total amount of lease liability and interest expense.