give answer in 2 step with explanation at the end of each step and final answer at the end:On January 1, 2027, Cheema Services, Incorporated, a
computer software training firm, leased several
comput

Question

give answer in 2 step with explanation at the end of each step and final answer at the end:On January 1, 2027, Cheema Services, Incorporated, a
computer software training firm, leased several
computers under a two - year operating lease
agreement from ComputerWorld Leasing, which
routinely finances equipment for other firms at an
annual interest rate of 4% . The contract calls for four
rent payments of $16,000 each, payable semiannually
on June 30 and December 31 each year. The computers
were acquired by ComputerWorld at a cost of $102,000
and were expected to have a useful life of six years with
no residual value. Both firms record amortization and
depreciation semiannually. Note: Use tables, Excel, or a
financial calculator. (FV of $1, PV of $1, FVA of $1, PVA
of $1, FVAD of $1 and PVAD of $1) Required: Prepare
appropriate journal entries recorded by Cheema
Services for the first year of the lease. Prepare
appropriate journal entries recorded by ComputerWorld
Leasing for the first year of the lease

VIPSolutions · Accepted Answer

## Step 1: Identify Lease Payments and Classification

### Cheema Services (Lessee):
- **Lease Type:** Operating Lease (since it’s specified as such)
- **Lease Payments:** $16,000 each, semiannually (June 30, Dec 31)
- **Total Payments in First Year:** 2 payments × $16,000 = **$32,000**

**Explanation:**  
For an operating lease, the lessee records rent expense as the payments are made or accrued. No asset/liability is initially recorded; only the rental expense is recognized in the income statement.

---

## Step 2: Prepare Journal Entries for the First Year

### **A. Cheema Services (Lessee):**
- **June 30, 2027**  
  ```
  Rent Expense        $16,000
      Cash                      $16,000
  ```
- **December 31, 2027**  
  ```
  Rent Expense        $16,000
      Cash                      $16,000
  ```
**Explanation:**  
Cheema Services records the lease payments as rent expense on each due date. No asset or lease liability is recorded for an operating lease under traditional (non-ASC 842/IFRS 16) accounting.

---

### **B. ComputerWorld Leasing (Lessor):**
- **June 30, 2027**  
  ```
  Cash                $16,000
      Lease Revenue             $16,000
  ```
- **December 31, 2027**  
  ```
  Cash                $16,000
      Lease Revenue             $16,000
  ```
**Explanation:**  
ComputerWorld records the lease payments as rental income/revenue each period. The computers remain on their books as assets and are depreciated over their useful life (6 years).

---

## **Final Answer (Journal Entries for 2027):**

### **Cheema Services (Lessee):**
```
June 30, 2027:
  Rent Expense        $16,000
      Cash                      $16,000

December 31, 2027:
  Rent Expense        $16,000
      Cash                      $16,000
```

### **ComputerWorld Leasing (Lessor):**
```
June 30, 2027:
  Cash                $16,000
      Lease Revenue             $16,000

December 31, 2027:
  Cash                $16,000
      Lease Revenue             $16,000
```

**Both parties record payments/revenue as they occur. ComputerWorld also records depreciation on the asset, but the question focuses on lease payments.**

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