Study Guide for Advanced Accounting Entries
1
VIII. Lease
Another method of obtaining a piece of equipment instead of purchasing is leasing.
With a lease, one obtains the use of an asset for a fixed period of time in exchange for a
rental payment. A true lease is a lease contract that specifies a set payment over a set
period of time. Any subsequent purchase of the equipment must be made at market value
at the end of this time period.
Lease Example:
A producer leases a sprinkler for his farm for 7 years. The first year payment is
$3500 or 10% of the purchase price. Over the next six years, the payments are $6527 a
year. At the end of the lease period, he has the option to buy the sprinkler at fair market
value.
Transactions the first year
Account Name/Number Account type Increase Decrease Debit Credit
Lease Expense 3,500 3,500
Checking Asset 3,500 3,500
Total Debit and Credits 3,500 3,500
Transactions after the first year
Account Name/Number Account type Increase Decrease Debit Credit
Lease Expense 6,527 6,527
Checking Asset 6,527 6,527
Total Debit and Credits 6,527 6,527
Explanation: The lease payments are expensed each year that they are paid thus
decreasing the checking account and increasing a producer’s expenses. If the producer
decides to buy this sprinkler at the end of the lease period, the amount that is agreed on
would be entered as an asset that is depreciated.
