Answer to Question #186903 in Accounting for Milan Patel

Question

There are 7 items listed below. Can you please answer all 7 questions. Can you also number them, so its easier for me know which question you answered? Thank you.

Debit ROU Asset

Credit Lease Liability

• What does this journal entry mean?

Debit Interest Expense

Debit Lease Liability

Credit Cash/Lease Payable 

• What does this journal entry mean?

Debit Amortization Expense

Credit Accumulated Amortization – ROU asset

• What does this journal entry mean?

Debit Lease Receivable

Credit Fixed Asset

Credit Gain

• What does this journal entry mean?

Debit Lease Receivable

Debit Residual Asset

Credit Fixed Asset 

• What does this journal entry mean?

Debit Cash (lease payment)

Credit Interest Income

Credit Lease Receivable 

• What does this journal entry mean?

Debit Cash

Credit Rental Income

• What does this journal entry mean?

Answer 1

$$Soolution$$

1. Debit ROU Asset

Credit Lease Liability

According to IFRS 16, the ROU asset and lease liability will be equal upon the lease commencement, i.e if a company has a lease without initial direct costs, prepaid/deferred rent, and without a tenant improvement allowance, then the ROU asset and the lease liability will be equal on the lease commencement date, and this is handled as per the journal entries for the present value of the lease payments.

2.Debit Interest Expense

Debit Lease Liability

Credit Cash/Lease Payable 

Upon receipt of lease invoices by the company from the lessor, it will record a portion of the invoice as an interest expense and then use the remainder to reduce the balance in the capital lease liability account; meaning that the the balance in the capital lease liability should be brought down to zero.

3.Debit Amortization Expense

Credit Accumulated Amortization – ROU asset

As per ASC 842, the depreciation of the ROU asset for an operating lease is classified as a lease expense o the income statement. Asset leasing describes the entry as the depreciation of the ROU asset.

4.Debit Lease Receivable

Credit Fixed Asset

Credit Gain

Here, since it is a capital lease, the lessor credits owned assets and debits a lease receivable account for the present value of the rents. The rents are an asset. In each payment, cash gets debited, the receivable is credited also the unearned income/gain is credited.

5.Debit Lease Receivable

Debit Residual Asset

Credit Fixed Asset 

The finance lease receivables are measured at the net investment in the lease.

6.Debit Cash (lease payment)

Credit Interest Income

Credit Lease Receivable 

Since an operating lease lets a company obtain equipment with virtually no upfront capital then the lease payment is debited i.e treated as a deductible cost of business. Therefore, the finance income shall be recognized based on a pattern reflecting constant rate of return on the lessor's net investment in the lease.

7.Debit Cash

Credit Rental Income

This entails accounting for an upfront rent payment in the general ledger, we will debit the amount received and then credit the unearned rent account. i.e if your tenant paid you $5,000 on April 1 for April's rent, you will have to debit $5000 to the cash account and credit $ 500 to unearned rent.