[Jeff_McD18]

Lai Corporation, which uses ASPE, leased equipment that was carried at a cost of $185,000 to Swander Inc. the lessee. The term of the lease is 7 years, beginning January 1, 2014, with equal rental payments of $36,194 at the beginning of each year. Swander pays all executory costs directly to third parties. The equipment’s fair value at the lease’s inception is $185,000. The equipment has a useful life of 8 years with no residual value. The lease has an implicit interest rate of 12%, no bargain purchase option, and no transfer of title. Collectibility is reasonably assured, with no additional costs to be incurred by Lai.

Prepare Lai Corporation’s January 1, 2014 journal entries at the inception of the lease.

We will need an entry to record the inception of the lease as well as an entry to record the first lease payment.

[Fidget1]

I'd classify it as a Finance Lease, so if all you're doing is recording the lease inception and first payment then you need to is:

Dr: Lease Receivable $185,000
Cr: PPE $185,000


Then to record the first payment, which happens on the same day as the lease inception, you:

Dr: Cash $36,194
Cr: Lease Receivable $36,194

There's no interest/finance charge to account for at this point - that would happen at the year end.