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Algoma, Inc., signs a five-year lease for office equipment with Office Solutions. The present value of the lease payments is $15,499. Prepare the journal entry that Algoma records at the inception of this finance lease.

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hyderali230

Answer:

Dr. Lease asset office equipment   $15,499

Cr. Lease Liability                             $15,499

Explanation:

A capital lease is a lease between two parties in which a party transfer leases asset to in exchange of lease payments.

To make a lease finance lease following criteria must be fulfilled.

  • The asset will be transferred to lessee at the end of lease period
  • Agreement must contain bargain purchase option
  • Lease period must be 75% or more of useful life of asset
  • Value of  lease must be equal or more than the market value of asset

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