Karuna Consulting Leased a Building on January 2,Year 1 $\begin{array} { l l } \text { Machine } & 250,000\\\text { Lease Obligation }&& 250,000\end{array}$

question 98

Multiple Choice

Karuna Consulting leased a building on January 2,Year 1.The lease qualifies as an operating lease.The annual payments are $25,000 at the beginning of each year,and the life of the lease is 10 years.What entry would the company make on January 2,Year 1?

• A)
• \(\begin{array} { l l }
• \text { Machine } & 250,000\\
• \text { Lease Obligation }&& 250,000
• \end{array}\)
• B)
• \(\begin{array} { l l }
• \text { Prepaid rent } & 250,000 \\
• \text { Lease Obligation } && 250,000
• \end{array}\)
• C)
• \(\begin{array} { l l }
• \text { Prepaid rent } & 25,000 \\
• \text { Lease Obligation } && 25,000
• \end{array}\)
• D)
• \(\begin{array} { c }
• \text { Lease Obligation } \quad 25,000\\
• \text { Machine } \quad 25,000
• \end{array} \quad 25,000\)

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Definitions:

Gross Profit

The difference between sales revenue and the cost of goods sold, before deducting operating expenses, interest, and taxes.

Expense

Outflows or using up of assets as a result of the company’s efforts to generate revenue.

Income Statement

A financial statement that shows a company's revenues and expenses over a specific period, ultimately revealing the net profit or loss for that time.

Operating Cycle

The time period between the acquisition of inventory and the collection of cash from receivables, indicating the efficiency of a company's cash flow.