Skysong Corporation recorded a right-of-use asset for $249,000 as a result of a finance lease on December 31, 2019. Skysong’s incremental borrowing rate is 11%, and the implicit rate of the lessor was not known at the commencement of the lease. Skysong made the first lease payment of $53,025 on on December 31, 2019. The lease requires 6 annual payments. The equipment has a useful life of 6 years with no residual value. Prepare Skysong's December 31, 2020, entries

The Journal entries are as follows:

(i) On December 31, 2020

Interest expense A/c Dr. $21,557

Lease Liability A/c     Dr.  $31,468

          To cash                                 $53,025

(To record the interest expense)

Workings:

Interest expense = [($2,49,000 - $53,025) × 11%]

                             = $21,557

Lease Liability = Cash - Interest expense

                        = $53,025 - $21,557

                        = $31,468

(ii) On December 31, 2020

Amortization expense A/c Dr. $41,500

                To Accumulated Amortization (right of use)      $41,500

(To record the amortization of right - of - use of asset)

Workings:

Amortization expense:

= $2,49,000 ÷ 6 years

= $41,500

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