Question

On January 3, 2017, Hanna Corporation signed a lease on a machine for its manufacturing operation. The lease requires Hanna to make six annual lease payments of $12,000 with the first payment due December 31, 2017. Hanna could have financed the machine by borrowing the purchase price at an interest rate of 7%.

a. Prepare the journal entries that Hanna Corporation would make on January 3 and December 31, 2017, to record this lease assuming its i. an operating lease and ii. a capital lease.

Round answers to the nearest whole number. If no entry is required, select "No entry" from the drop-down answer options for the debit and credit entries.

i. the lease is reported as an operating lease.

General Journal
Date	Description	Debit	Credit
Jan. 3	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	To record inception of lease
Dec. 31	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	To record depreciation expense.
Dec. 31	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	To record payment on lease.

ii. the lease is reported as a capital lease.

General Journal
Date	Description	Debit	Credit
Jan. 3	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	To record inception of lease
Dec. 31	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	To record depreciation expense.
Dec. 31	AnswerNo EntryRent expenseCashLeased assetLease liabilityDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	AnswerNo EntryRent expenseCashLeased assetPrepaid rentDepreciation expenseAccumulated depreciationInterest expense	Answer	Answer
	Cash	Answer	Answer
	To record payment on lease.

b. Assuming that the lease is treated as a capital lease, post the journal entries of part a to the appropriate T-accounts.

Cash
	Answer	Answer

Lease Liability
	Answer	Answer

Leased Asset
	Answer	Answer

Accumulated Depreciation
	Answer	Answer

Interest Expense
	Answer	Answer

Depreciation Expense
	Answer	Answer

c. Show how the entries posted in part b would affect the financial statements using the financial statement effects template.

Balance Sheet Transaction Cash Asset + Noncash Assets - Contra Asset = Liabilities + Contrib. Capital + Earned Capital 1. Signed a capital lease. Answer + Answer - Answer = Answer + Answer + Answer 2. Depreciation on leased asset. Answer + Answer - Answer = Answer + Answer + Answer 3. Made annual lease payment Answer + Answer - Answer = Answer + Answer + Answer

Income Statement Revenue - Expenses = Net Income Answer - Answer = Answer Answer - Answer = Answer Answer - Answer = Answer

Answer 1

(i) When lease is considered as Operating Lease In the books of Hanna Corporation (lessee) (in $) (in S) Journal Particulars Debit Credit Date 03-Jan-17 No entry (To record the inception of lease) 31-Dec-17 No entry (To record depreciation expense) 31-Dec-17 Lease rental expense 12,000 Cash 12,000 (To record the payment on lease)

(i) When lease is considered as Capital Lease Rate of interest for discounting 7% (Lessee's incremental borrowing rate) Annual lease payments $ 12,000 PV Annuity Factor (7%, 6 yrs) 4.7665 Asset to be capitalized 57,198 In the books of Hanna Corporation (lessee) (in $) Credit (in $) Journal Particulars 03-Jan-17 Machinery Lease Payable Debit Date 57,198 57,198 (To record the inception of lease) 31-Dec-17 Depreciation expense (57198/6) Accumulated Depreciation 9,533 9,533 (To record depreciation expense) 31-Dec-17 Interest expense (57198*7%) Lease Payable Cash 4,004 7,996 12,000 (To record the payment on lease)