On January 1, 20x1, Lahey Co. signs a 10-year lease agreement to lease a storage building from Sheffield Company. The following information pertains to this agreement:

1. The agreement requires equal annual rental payments of $72,000 beginning on January 1, 20x1.

2. The fair value of the building on January 1, 20x1 is $440,000.

3. The building has an estimated economic life of 12 years, with a zero residual value. Lahey depreciates similar buildings by the straight-line method.

4. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor.

5. Lahey’s incremental borrowing rate is 12% per year. The lessor’s implicit rate is also 12% per year.

6. The yearly lease payment includes $2,470.51 of executory costs related to taxes on the property. Record this tax in property tax expense when paid (do not accrue it).

Prepare the journal entries on the Lahey’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 20x1 and 20x2. Lahey’s fiscal year ends on December 31.

1) 1/1/x1

2) 12/31/x1

3) 1/1/x2

4) 12/31/x2

Answer rating: 100% (QA)

Year Journal Entries Date Account title explanation 0101x1 Right to use Asset Lease Liability to rec... View the full answer