On January 1, 2019, Wynn Manufacturing leased a floor of a building for use in its North American operations from Easymoney Bank. The 9-year, noncancellable lease requires annual lease payments of $12,000, beginning January 1, 2019, and at each January 1 thereafter through 2027. The lease agreement does not transfer ownership, nor does it contain a purchase option. The floor of the building has a fair value of $85,000 and an estimated remaining life of 10 years. Easymoney Bank's implicit rate of 11% is known to Wynn.
At the end of 2019, which of the following journal entries will be used by Wynn to record Interest Expense?

Question

Quizplus · Accepted Answer

The correct answer is A because at the end of 2019, Wynn will need to record the interest expense for the year. The interest expense is calculated as the lease payment multiplied by the implicit rate, which is $12,000 x 11% = $1,320. The journal entry to record the interest expense would be to debit Interest Expense for $1,320 and credit Interest Payable for $1,320.

On January 1, 2019, Wynn Manufacturing Leased a Floor of a Building