# Lease Accounting Step-by-Step Solution Let's break down the for **Cheema Services (Lessee)** and **ComputerWorld Leasing (Lessor)** as required. --- ## 1. **Cheema Services, Inc. (Lessee) Entries** ### **A. Lease Details & Accounting Overview** - **Type:** Operating Lease (since it's less than the useful life, and no transfer of ownership) - **Lease Payment:** $10,500 semiannually (June 30, Dec 31) × 2 years = 4 payments - **No asset/liability recognized under operating lease (old GAAP), only rent expense as paid** - **Amortization:** For right-of-use asset if it was a finance lease, but here only rent expense #### **Journal Entries** ####i. January 1, 2027: Beginning of Lease** -No entry required for operating lease at inception.** (Just disclosure; no asset/liability recognized.) #### **ii. June 30, 2027: First Lease Payment** ```markdown Rent Expense ........... $10,500 Cash ....................... $10,500 ``` *Record the first semiannual lease payment.* #### **iii. June 30, 2027: Amortization** - **No amortization entry for operating lease.** #### **iv. December 31, 2027: Second Lease Payment** ```markdown Rent Expense ........... $10,500 Cash ....................... $10,500 ``` *Record the second semiannual lease payment.* #### **v. December 31, 2027: Amortization** - **No amortization entry for operating lease.** --- ### **Summary Table for Cheema Services Entries** | Date | Account | Debit | Credit | |----------------|---------------------|------------|-----------| | June 30, 2027 | Rent Expense | $10,500 | | | | Cash | | $10,500 | | Dec 31, 2027 | Rent Expense | $10,500 | | | | Cash | | $10,500 | --- ## 2. **ComputerWorld Leasing (Lessor) Entries** ### **A. Lease Details & Accounting Overview** - **Type:** Operating Lease (Lessor keeps asset on books, depreciates it) - **Cost of Computers:** $91,000, Useful Life: 5 years, No residual value - **Semiannual Depreciation:** $91,000 / 5 / 2 = $9,100 per period #### **Journal Entries** #### **i. January 1, 2027: Beginning of Lease** - **No entry required (asset remains on books as Equipment).** #### **ii. June 30, 2027: First Lease Payment Received** ```markdown Cash ........................... $10,500 Lease Revenue .................... $10,500 ``` *Record receipt of first semiannual lease payment.* #### **iii. June 30, 2027: Depreciation** ```markdown Depreciation Expense ........... $9,100 Accumulated Depreciation .......... $9,100 ``` *Record semiannual depreciation (straight-line over 5 years).* #### **iv. December 31, 2027: Second Lease Payment Received** ```markdown Cash ........................... $10,500 Lease Revenue .................... $10,500 ``` *Record receipt of second semiannual lease payment.* #### **v. December 31, 2027: Depreciation** ```markdown Depreciation Expense ........... $9,100 Accumulated Depreciation .......... $9,100 ``` *Record semiannual depreciation (straight-line over 5 years).* --- ### **Summary Table for ComputerWorld Leasing Entries** | Date | Account | Debit | Credit | |----------------|---------------------------|-----------|-----------| | June 30, 2027 | Cash | $10,500 | | | | Lease Revenue | | $10,500 | | June 30, 2027 | Depreciation Expense | $9,100 | | | | Accumulated Depreciation | | $9,100 | | Dec 31, 2027 | Cash | $10,500 | | | | Lease Revenue | | $10,500 | | Dec 31, 2027 | Depreciation Expense | $9,100 | | | | Accumulated Depreciation | | $9,100 | --- ## **Conclusion** - **Cheema Services (Lessee):** Only records rent expense as payments are made; no asset or liability is recognized for operating leases. - **ComputerWorld Leasing (Lessor):** Recognizes lease revenue as payments are received and continues to depreciate the computers over their useful life. > **Note:** If you were to treat this as a **finance lease** (for lessee) under ASC 842 or IFRS 16, you would recognize a right-of-use asset and lease liability, and amortize accordingly, but this case is a classic operating lease. --- If you need the **present value calculations** or **accounting under new lease standards (ASC 842/IFRS 16)**, let me know!