Accounting for Leases On July 1, Pine Region Dairy leased equipment from Farm Am
ID: 2574125 • Letter: A
Question
Accounting for Leases On July 1, Pine Region Dairy leased equipment from Farm America for a period of three years. The lease calls for monthly payments of $2,500 payable in advance on the first day of each month, beginning July1 Prepare the journal entry needed to record this lease in the accounting records of Pine Region Dairy on July 1 under each of the following independent assumptions a. The lease represents a simple rental arrangement b. At the end of three years, title to this equipment will be transferred to Pine Region Dairy at no additional cost. The present value of the 36 monthly lease payments is $76,021, of which $2,500 is paid in cash on July 1. None of the initial $2,500 is allocated to interest expense. c. Why is situation a, the operating lease, sometimes called off-balance sheet financing? d. Would it be acceptable for a company to account for a capital lease as an operating lease to report rent expense rather than a long-term liability?Explanation / Answer
a. Simple Lease Entry
Date
Particulars
Dr. Amount
Cr. Amount
July 1
Prepaid Lease Rent
TO Cash
2,500
2,500
July 30
Lease Expense
TO Prepaid Lease Rent
2,500
2,500
Note: Entry can also be made by directly debiting the expense account.
b. This is a case of Finance lease where ownership of asset will be transferred at the end of the lease period.
Finance Lease Journal Entry
Date
Particulars
Dr. Amount
Cr. Amount
July 1
Leased Equipment
TO Lease Payable
(Being asset recorded at present value of minimum lease payment)
76,021
76,021
July 1
Lease Payable
TO Cash
2,500
2,500
Date
Particulars
Dr. Amount
Cr. Amount
July 1
Prepaid Lease Rent
TO Cash
2,500
2,500
July 30
Lease Expense
TO Prepaid Lease Rent
2,500
2,500