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Journal entries for leases

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On January 1, year 1, a firm agrees to lease equipment on the following terms:
3 annual payments of $4,000 due on December 31, of each year

Assume the market interest rate is 10%

Prepare entries to record the above transaction as follows:

a.) as if a capital lease:
1) signing of contract
2) December 31, Year 1 payment
3) December 31, Year 1 depreciation

b) as if an operating lease:
1) signing of contract
2) December 31, Year 1 payment
3) December 31, Year 1 depreciation

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The solution explains the journal entries for leases.

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a. 1. In a capital lease, the lease is recorded as the present value of lease payments. In this case there are 3 annual payments of $4,000 and the discounting rate is 10%. On signing the contract the lease would be recorded as the present value of these three payments.
PV of payments = 4,000 X PVIFA (3,10%)
PV of ...

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