Asked by Nathan Perrine on May 01, 2024
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On 1 July 2021, One Ltd leased a network server from Short Ltd. The server had cost Short Ltd $32 000 on the same day. The lease agreement cost Short Ltd $1390 to set up and included the following: Lease term 15 years: Estimated economic life of the network server 10 years: The lease is cancellable Annual rental payment (in arrears)$6,500Residual value at end of lease term $24,000Residual guarantee by One Ltd $0Interest rate implicit in the lease 8%\begin{array}{lr}\text {Lease term }&15 \text { years: }\\\text {Estimated economic life of the network server }&10 \text { years: }\\\text { The lease is cancellable}&\\\text { Annual rental payment (in arrears)}&\$6,500\\\text {Residual value at end of lease term }&\$24,000\\\text {Residual guarantee by One Ltd }&\$0\\\text {Interest rate implicit in the lease }&8\%\\\end{array}Lease term Estimated economic life of the network server The lease is cancellable Annual rental payment (in arrears)Residual value at end of lease term Residual guarantee by One Ltd Interest rate implicit in the lease 15 years: 10 years: $6,500$24,000$08%
The journal entry recorded by the lessor for the annual recognition of the initial direct costs would be:
a. DR Deferred initial direct costs - equipment $278 CR Lease expense $278\begin{array}{ll}\text { DR }&\text { Deferred initial direct costs - equipment }&\$278\\\text { CR }&\text {Lease expense }&&\$278\\\end{array} DR CR Deferred initial direct costs - equipment Lease expense $278$278
b. DR Lease expense$278 CR Cash $278\begin{array}{lll}\text { DR }&\text { Lease expense}\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad&\$278\\\text { CR }&\text { Cash }&&\$278\\\end{array} DR CR Lease expense Cash $278$278
c. DR Cash $278 CR Deferred initial direct costs - equipment $278\begin{array}{llc}\text { DR } & \text { Cash } & \text { \$278 } \\\text { CR } & \text { Deferred initial direct costs - equipment } &&\$ 278\end{array} DR CR Cash Deferred initial direct costs - equipment $278 $278
d. DR Lease expense$278 CR Deferred initial direct costs - equipment $278\begin{array}{lll}\text { DR }&\text { Lease expense}&\$278\\\text { CR }&\text { Deferred initial direct costs - equipment }&&\$278\\\end{array} DR CR Lease expense Deferred initial direct costs - equipment $278$278
Initial Direct Costs
Expenses directly associated with obtaining a financing agreement or leasing contract.
Lease Expense
The cost incurred from leasing an asset, recognized in the income statement over the lease term as an operating expense for operating leases or as depreciation and interest for finance leases.
- Understand the treatment of initial direct costs in operating leases.
Verified Answer
CC
Learning Objectives
- Understand the treatment of initial direct costs in operating leases.