Karuna Consulting leased a building on January 2, 2013. The lease qualifies as an operating lease. The annual payments are $25,000 at the beginning of each year, and the life of the lease is 10 years. What entry would the company make on January 2, 2013?
A)Machine 250,000 Lease Obligation 250,000
B)Prepaid Rent 250,000 Lease Obligation 250,000
C)Prepaid Rent 25,000 Lease Obligation 25,000
D)No entry is necessary.

Question

Quizplus · Accepted Answer

Since the lease payments are made at the beginning of each year, Karuna Consulting would record the prepaid rent of $25,000 on January 2, 2013, and create a corresponding liability, Lease Obligation, for the same amount. The entry would be:

Prepaid Rent 25,000
Lease Obligation 25,000

Option A is not correct because it shows the entire lease obligation being recorded upfront, which would not be the case with an operating lease. Option B is also incorrect because it shows the entire lease cost being recorded upfront as Prepaid Rent. Option D is not correct because there needs to be an entry to record the prepaid rent and the corresponding liability.

Karuna Consulting Leased a Building on January 2, 2013