Question

Harbor (lessee) signs a five-year capital lease for office equipment with a \(10,000 annual lease payment. The present value of the five annual lease payments is \)41,000, based on a 7% interest rate.

1. Prepare the journal entry Harbor will record at inception of the lease.

2. If the leased asset has a five-year useful life with no salvage value, prepare the journal entry Harbor will record each year to recognize depreciation expense related to the leased asset.

Short answer

1. The lessee records the leased office equipment as assets and liability.
2. The depreciation expense related to the leased office equipment is $8,200

Step-by-step solution

Meaning of Capital Lease

A capital lease is a long-term contract in which the lessor transfers almost all risks and rewards of ownership to the Lessee.

Step 2:Journal entry at the inception of this capital lease

Date	Account and explanation	Debit ($)	Credit ($)
	Leased Asset- Office Equipment	41,000
	Lease Liability		41,000
	(To record leased asset and lease liability)

Step 3:Journal entryto record depreciation expense

Date	Account and explanation	Debit ($)	Credit ($)
	Depreciation Expense-Office Equipment	8,200
	Accumulated Depreciation-Office Equipment		8,200
	(To recorddepreciation on leased asset )

Working note:

$\begin{array}{c}\mathbf{D}\mathbf{e}\mathbf{p}\mathbf{r}\mathbf{e}\mathbf{c}\mathbf{i}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{n}\mathbf{=}\frac{\mathbf{\$}\mathbf{41}\mathbf{,}\mathbf{000}}{\mathbf{5}}\\ \mathbf{=}\mathbf{\$}\mathbf{8}\mathbf{,}\mathbf{200}\end{array}$