Assume a company enters into a capital lease on January 1, 2012, to acquire the use of a machine for 5 years. The present value of the lease payments is $60,000, and the interest rate is 12 percent. If annual rental payments of $18,000 are due at the end of each year, the journal entry to record the first annual payment on December 31, 2012, would include a debit to

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Since this is a capital lease, the lessee (company leasing the machine) records the present value of lease payments as a lease liability and an asset (the machine) on the balance sheet. The lease liability will be reduced as the lease payments are made.

To record the first annual payment on December 31, 2012, the journal entry would be:

Debit: Lease Liability $10,800
Credit: Cash $18,000
Credit: Interest Expense $7,200

The Interest Expense is calculated as the beginning lease liability (present value of lease payments) multiplied by the interest rate of 12%.

Therefore, the correct answer is C) Interest Expense, $7,200 and Lease Liability, $10,800.

Assume a Company Enters into a Capital Lease on January