The following relate to an operating lease agreement: The lease term is 3 years,

Question

The following relate to an operating lease agreement:

The lease term is 3 years, beginning January 1, 2018

The leased asset cost the lessor $800,000 and had a useful life of 8 years with no residual value. The lessor uses straight-line depreciation for its depreciable assets.

Annual lease payments at the beginning of each year were $137,000.

Incremental costs of negotiating and consummating the completed lease transaction incurred by the lessor were $2,400.

Required:

Prepare the appropriate entries for the lessor from the beginning of the lease through the end of the lease term.

Explanation / Answer

Answer: Journal Enteries in the books of lessor:

In 1st Year

1. Expenses to lease A/c dr.                                         2400

               To Bank A/c                                                 2400

(Being intial expense incurred for comleting the lease transaction)

2. Lessee A/c   dr                                                137000

           To Lease Rent receivable                           137000

(Being Lease rent receivable occured)

3. Bank A/c   dr                                                 1370000

           To Lessee A/c                                         137000

(Being Lease rent received from Lessee)

4. Depreciation A/c dr                                           100000

         To Assets A/c                                              100000

(Being Depreciation has been charged)

5. Profit and Loss A/c dr                                      102400

          To Depreciation A/c                                    100000

           To Expenses   A/c                                      2400

(Being Depreciation and Expenses on lease has been write-off in Profit and Loss A/c)

In Year: 2

1. Lessee A/c dr.                                            1370000

         To Lease Rent receivable                        137000

(Being Lease Rent receivable occured)

2. Bank A/c     dr.                                           137000

          To Lessee A/c                                       137000

(Being Amount Received from leassee)

3. Depreciation A/c   dr.                                      100000

         To Assets A/c                                            100000

(Being Depreciation Charged)

4.     Profit and Loss A/c   dr.                                 100000

               To Depreciation A/c                                100000

(Being Depreciation write-off in Profit and Loss account)

In Year 3rd

1. Lessee A/c   dr.                                                  137000

             To Lease Rent receivable                             137000

(Being lease rent occured)

2.   Bank A/c   dr.                                                        137000

             To Lessee A/c                                                137000

(Being Lease Rent received)

3. Depreciation A/c   dr.                                                100000

                To Assets A/c                                                100000

(Being Depreciation charged)

4.   Profit And Loss A/c                                                    100000

             Depreciation A/c                                                  100000

(Being Depreciation Write-off In Profit and Loss A/c)

Note:

1. Since this is operating Lease Depreciation will be charged in the books of Leaser.

2. In the absence of information is has been assumed that Lesseor has incurred the expenses to complete the lease transaction.

3. From 4th year there will be only Depreciation entry in the books of Lessor as 3rd and 4th Journal entry mention above.

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