On 1 July 2021, One Ltd Leased a Network Server

question 2

Short Answer

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: $\begin{array}{lr}\text {Lease term }&15 \text { years: }\\\text {Estimated economic life of the network server }&10 \text { years: }\\\text { The lease is cancellable}&\\\text { Annual rental payment (in arrears)}&\$6,500\\\text {Residual value at end of lease term }&\$24,000\\\text {Residual guarantee by One Ltd }&\$0\\\text {Interest rate implicit in the lease }&8\%\\\end{array}$
The journal entry recorded by the lessor to recognise the initial direct costs incurred would be:
a. $\begin{array}{lcc}\text { DR } & \text { Lease expense } \quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad& \$ 1390 \\\text { CR } & \text { Cash } && \$ 1390\end{array}$

b. $\begin{array}{lcc}\text { DR } & \text { Deferred initial direct costs - equipment } & \$ 1390 \\\text { CR } & \text { Cash } && \$ 1390\end{array}$

c. $\begin{array}{lcc}\text { DR } &\text { Lease expense } & \$ 1390 \\\text { CR } &\text { Deferred initial direct costs - equipment }&& \$ 1390\end{array}$

d. $\begin{array}{lcc}\text { DR } &\text { Cash }& \$ 1390 \\\text { CR } &\text { Deferred initial direct costs - equipment }&& \$ 1390\end{array}$

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Definitions:

Location Convenient

A criterion describing a place or venue that is easily accessible and practical for users or customers, often considered in business site selection.

Customers

Individuals or entities that purchase goods or services from a business.

Purchase

The act of buying goods or services, acquiring property or items in exchange for money.

Place Utility

Refers to the increased value that is added to goods by having them available at a location where they are wanted by consumers.