On 1 July 2021, One Ltd Leased a Network Server

question 5

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 for the annual recognition of the initial direct costs would be:
a. $\begin{array}{ll}\text { DR }&\text { Deferred initial direct costs - equipment }&\$278\\\text { CR }&\text {Lease expense }&&\$278\\\end{array}$

b. $\begin{array}{lll}\text { DR }&\text { Lease expense}\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad&\$278\\\text { CR }&\text { Cash }&&\$278\\\end{array}$

c. $\begin{array}{llc}\text { DR } & \text { Cash } & \text { \$278 } \\\text { CR } & \text { Deferred initial direct costs - equipment } &&\$ 278\end{array}$

d. $\begin{array}{lll}\text { DR }&\text { Lease expense}&\$278\\\text { CR }&\text { Deferred initial direct costs - equipment }&&\$278\\\end{array}$

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