{"id":4035,"date":"2020-10-24T16:28:38","date_gmt":"2020-10-24T16:28:38","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-financialaccounting\/?post_type=chapter&#038;p=4035"},"modified":"2020-11-25T16:26:44","modified_gmt":"2020-11-25T16:26:44","slug":"journal-entries","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/chapter\/journal-entries\/","title":{"raw":"Journal Entries","rendered":"Journal Entries"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li style=\"font-weight: 400;\">Record entries associated with leases<\/li>\r\n<\/ul>\r\n<\/div>\r\n<h2>Finance Lease<\/h2>\r\nFor a finance lease, the lessee debits the fixed asset account by the present value of the minimum lease payments. The credit to lease liability account is the difference between the value of the equipment and cash paid at the beginning of the year. The lessee records depreciation expense on the asset just like any other purchased asset, and the lease liability account is treated just like a note payable with a declining balance.\r\n<h2>Operating Lease with Right-of-Use Asset<\/h2>\r\n<img class=\"alignright wp-image-4972 \" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/02234218\/signature-2003808_1920-1024x683.jpg\" alt=\"A person signing a lease.\" width=\"399\" height=\"266\" \/>\r\n\r\nThe calculations may seem complicated at first, but in essence, it is a simple two-step process:\r\n<ol>\r\n \t<li style=\"font-weight: 400;\">Determine the present value of the lease payments<\/li>\r\n \t<li style=\"font-weight: 400;\">Determine the direct payments that are part of the right-to-use asset<\/li>\r\n<\/ol>\r\nHere is an example of the entries you would make for an operating lease that creates a right-of-use asset:\r\n<ul>\r\n \t<li style=\"font-weight: 400;\">Assume a six-year auto lease with no renewal options that calls for a $4,000 lease payment, paid at the end of each year.<\/li>\r\n \t<li style=\"font-weight: 400;\">The company\u2019s normal borrowing rate is 9%.<\/li>\r\n \t<li style=\"font-weight: 400;\">There is an initial direct cost of $1,000.<\/li>\r\n<\/ul>\r\nThe lease liability will be recorded as the present value of the six payments, discounted at 9%.\r\n<ul>\r\n \t<li style=\"font-weight: 400;\">Therefore, the lease liability would equal $17,943.60<\/li>\r\n \t<li style=\"font-weight: 400;\">(Present value of an ordinary annuity of $4,000 at 9% for six years factor = 4.4859)<\/li>\r\n<\/ul>\r\nThe right-of-use asset will be recorded as the lease liability plus initial direct costs plus prepayments less any lease incentives\r\n\r\nTherefore, the right-of-use asset would be calculated as $17,943.60 (lease liability) + $1,000.00 (direct costs) = $18,943.60\r\n\r\nThe journal entry would be:\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<th scope=\"row\"><\/th>\r\n<td>Right-of-use asset<\/td>\r\n<td class=\"c\"><\/td>\r\n<td class=\"r\">$18,943.60<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><\/th>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Lease liability<\/td>\r\n<td class=\"c\"><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">$17,943.60<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><\/th>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Checking account<\/td>\r\n<td class=\"c\"><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">$1,000.00<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<img class=\"alignright wp-image-4974 \" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/02234432\/women-1209678_1920-1024x683.jpg\" alt=\"Two coworkers looking at a computer screen.\" width=\"400\" height=\"267\" \/>As the lease is paid down, the present value is recalculated and the right-of-use assets are depreciated. The change in the lease is a combination of interest, principal, and amortization.\r\n\r\nThe exception for leases with a term of 12 months or less permits the lessee to make an accounting policy election not to recognize leased assets and lease liabilities, and instead recognize lease expenses on a straight line basis over the lease term, consistent with the accounting for operating leases under SFAS 13. Basically, this means the lessee debits lease expense for the lease payments when it credits the checking account for the disbursement, and doesn\u2019t have to recognize an asset.\r\n<div class=\"textbox tryit\">\r\n<h3>PRACTICE QUESTION<\/h3>\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/23821\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li style=\"font-weight: 400;\">Record entries associated with leases<\/li>\n<\/ul>\n<\/div>\n<h2>Finance Lease<\/h2>\n<p>For a finance lease, the lessee debits the fixed asset account by the present value of the minimum lease payments. The credit to lease liability account is the difference between the value of the equipment and cash paid at the beginning of the year. The lessee records depreciation expense on the asset just like any other purchased asset, and the lease liability account is treated just like a note payable with a declining balance.<\/p>\n<h2>Operating Lease with Right-of-Use Asset<\/h2>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-4972\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/02234218\/signature-2003808_1920-1024x683.jpg\" alt=\"A person signing a lease.\" width=\"399\" height=\"266\" \/><\/p>\n<p>The calculations may seem complicated at first, but in essence, it is a simple two-step process:<\/p>\n<ol>\n<li style=\"font-weight: 400;\">Determine the present value of the lease payments<\/li>\n<li style=\"font-weight: 400;\">Determine the direct payments that are part of the right-to-use asset<\/li>\n<\/ol>\n<p>Here is an example of the entries you would make for an operating lease that creates a right-of-use asset:<\/p>\n<ul>\n<li style=\"font-weight: 400;\">Assume a six-year auto lease with no renewal options that calls for a $4,000 lease payment, paid at the end of each year.<\/li>\n<li style=\"font-weight: 400;\">The company\u2019s normal borrowing rate is 9%.<\/li>\n<li style=\"font-weight: 400;\">There is an initial direct cost of $1,000.<\/li>\n<\/ul>\n<p>The lease liability will be recorded as the present value of the six payments, discounted at 9%.<\/p>\n<ul>\n<li style=\"font-weight: 400;\">Therefore, the lease liability would equal $17,943.60<\/li>\n<li style=\"font-weight: 400;\">(Present value of an ordinary annuity of $4,000 at 9% for six years factor = 4.4859)<\/li>\n<\/ul>\n<p>The right-of-use asset will be recorded as the lease liability plus initial direct costs plus prepayments less any lease incentives<\/p>\n<p>Therefore, the right-of-use asset would be calculated as $17,943.60 (lease liability) + $1,000.00 (direct costs) = $18,943.60<\/p>\n<p>The journal entry would be:<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<th scope=\"row\"><\/th>\n<td>Right-of-use asset<\/td>\n<td class=\"c\"><\/td>\n<td class=\"r\">$18,943.60<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><\/th>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Lease liability<\/td>\n<td class=\"c\"><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">$17,943.60<\/td>\n<\/tr>\n<tr>\n<th><\/th>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Checking account<\/td>\n<td class=\"c\"><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">$1,000.00<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-4974\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/02234432\/women-1209678_1920-1024x683.jpg\" alt=\"Two coworkers looking at a computer screen.\" width=\"400\" height=\"267\" \/>As the lease is paid down, the present value is recalculated and the right-of-use assets are depreciated. The change in the lease is a combination of interest, principal, and amortization.<\/p>\n<p>The exception for leases with a term of 12 months or less permits the lessee to make an accounting policy election not to recognize leased assets and lease liabilities, and instead recognize lease expenses on a straight line basis over the lease term, consistent with the accounting for operating leases under SFAS 13. Basically, this means the lessee debits lease expense for the lease payments when it credits the checking account for the disbursement, and doesn\u2019t have to recognize an asset.<\/p>\n<div class=\"textbox tryit\">\n<h3>PRACTICE QUESTION<\/h3>\n<p>\t<iframe id=\"lumen_assessment_23821\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=23821&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_23821\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-4035\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Journal Entries. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li><strong>Authored by<\/strong>: Juan Ospina. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/pixabay.com\/photos\/signature-contract-2003808\/\">https:\/\/pixabay.com\/photos\/signature-contract-2003808\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em>. <strong>License Terms<\/strong>: https:\/\/pixabay.com\/service\/terms\/#license<\/li><li><strong>Authored by<\/strong>: Free-Photos. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/pixabay.com\/photos\/women-teamwork-team-business-1209678\/\">https:\/\/pixabay.com\/photos\/women-teamwork-team-business-1209678\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em>. <strong>License Terms<\/strong>: https:\/\/pixabay.com\/service\/terms\/#license<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":90270,"menu_order":14,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Journal Entries\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"\",\"author\":\"Juan Ospina\",\"organization\":\"\",\"url\":\"https:\/\/pixabay.com\/photos\/signature-contract-2003808\/\",\"project\":\"\",\"license\":\"cc0\",\"license_terms\":\"https:\/\/pixabay.com\/service\/terms\/#license\"},{\"type\":\"cc\",\"description\":\"\",\"author\":\"Free-Photos\",\"organization\":\"\",\"url\":\"https:\/\/pixabay.com\/photos\/women-teamwork-team-business-1209678\/\",\"project\":\"\",\"license\":\"cc0\",\"license_terms\":\"https:\/\/pixabay.com\/service\/terms\/#license\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-4035","chapter","type-chapter","status-publish","hentry"],"part":825,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/4035","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/users\/90270"}],"version-history":[{"count":9,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/4035\/revisions"}],"predecessor-version":[{"id":6597,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/4035\/revisions\/6597"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/parts\/825"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/4035\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/media?parent=4035"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=4035"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/contributor?post=4035"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/license?post=4035"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}