JE12: Operating lease arrangement: Company entered into a 4…
JE12: Operating lease arrangement: Company entered into a 4 year lease agreement on Jan 1, 2025 with the below payment terms. They agreed year 1 to be rent free. The life of the equipment is 10 years. There are no renewal options or title transfer. Incremental borrowing rate is 7%. PV of the payments at 7% = 29.211Payments (at the end of the year): Year 1 $0 Year 2 $10,000 Year 3 $12,000 Year 4 $14,000 TOTAL $36,000 Lease Expense ROU Asset Amortization (Operating Lease — Plug) For an operating lease, each period the ROU asset is reduced by: Lease expense − Interest accretion. Year Beg. ROU Asset Interest Lease expense ROU reduction End. ROU Asset Inception Y1 Y2 Y3 Y4 Lease Liability Amortization (Effective Interest) Net reduction in lease liability: Payment – Interest Year Beg. Liability Interest Payment Net reduction in lease liability End. Liability Inception Y1 Y2 Y3 Y4 What is the annual lease expense based on the payment terms. Complete the ROU Asset Amortization and Lease Liability Amortization schedule above. Record the ROU asset and Lease Liability on commencement of the lease. Record the rent expense for Year 1.
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