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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Definitions:

Lease Accounting

The process of recording and reporting financial transactions related to leases in the company's financial statements, following specific accounting standards.

U.S. GAAP

United States Generally Accepted Accounting Principles, a set of accounting rules and standards used in the United States for preparing financial statements.

Operating Leases

An agreement that allows for the use of an asset but does not grant ownership rights of the asset to the lessee.