When Sunny City makes its annual lease payment on an unpaid lease obligation, the journal entry for the debt service fund accounts will include:
A) A debit to Lease Obligation Payable.
B) A credit to Lease Obligation Payable.
C) A debit to Lease Expense.
D) A debit to Expenditures-Principal of Lease Obligation.

Question

Quizplus · Accepted Answer

The annual lease payment should be recorded as an expenditure in the debt service fund accounts. Specifically, it should be debited to Expenditures-Principal of Lease Obligation to reflect the reduction in the principal amount of the lease obligation. Therefore, option D is the correct choice. Options A and B are incorrect because they involve the Lease Obligation Payable account, which is not affected by the actual lease payment. Option C is also incorrect because it implies that the entire lease payment is an expense, which is not the case since a portion of it represents a reduction of the principal amount of the lease obligation.

When Sunny City Makes Its Annual Lease Payment on an Unpaid