On July 1, Pine Region Dairy leased equipment from Farm America for a period of

Question

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 July 1. 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)

b)

c)

d)

Rent Expense A/c--------------------------Dr $2,500           To Cash A/c $2,500

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