On January 1, 2018, Wellburn Corporation leased an asset from Tabitha Company. The asset originally cost Tabitha $300,000. The lease agreement is an operating lease that calls for four annual payments beginning on January 1, 2018, in the amount of $36,000. The other three remaining payments will be made on January 1 of each subsequent year. Which of the following journal entries should Tabitha record on January 1, 2018?

Question

Quizplus · Accepted Answer

On January 1, 2018, Tabitha Company will record the following journal entry for the lease agreement:
Lease Receivable:      $113,672
     Lease Revenue:         $36,000
     Asset:                        $300,000
     Lease Liability:               $73,328
The present value of the lease payments using the interest rate implicit in the lease (9%) is $113,672 ($36,000 x 3.1562). Tabitha will record the lease receivable for this amount, which represents the present value of the lease payments that Wellburn will make over the life of the lease. Tabitha will also recognize lease revenue of $36,000 for the first year of the lease. The asset will remain on Tabitha's books, and the lease liability will be recorded for the difference between the present value of the lease payments and the asset cost, or $73,328 ($300,000 - $113,672).

On January 1, 2018, Wellburn Corporation Leased an Asset from Tabitha