Level 6: Bonds and leases · Exercise 72 of 72 · Pro

Operating lease: first annual payment

A journal entry exercise from Journaldrill. Solve it with an account picker and debit and credit fields in your browser, and it is checked the moment you submit.

The task

On January 1, Harbor Clinic signs a 3-year operating lease for office space with annual payments of $20,000 due each December 31. The lease liability and the right-of-use asset were both recorded at $54,464.96, the present value of the payments at 5%. On December 31 Harbor makes the first payment. Record the payment and the year's lease cost in one entry: lease expense is the straight-line annual cost, the liability falls by the payment less interest accretion on its opening balance, and the right-of-use asset is reduced by that same amount.

What this exercise teaches

Lease Expense is the straight-line cost, $60,000 / 3 = $20,000, and Cash is credited for the payment. Interest accretion on the liability is $54,464.96 x 5% = $2,723.25, so the liability falls by $20,000 - $2,723.25 = $17,276.75. Under ASC 842 an operating lease reports a single lease cost, so the right-of-use asset is reduced by the same $17,276.75 instead of recording separate Interest Expense and Amortization Expense.

A hint if you get stuck

An operating lease shows one straight-line lease cost, not interest plus amortization. Accretion is $54,464.96 x 5%; the asset absorbs the difference.