How to Record Lease Payments for Sweetwater Furniture Company?

How can we record Sweetwater Furniture Company's lease payment on December 31, 2025 and December 31, 2035?

What are the calculations for the 5th lease payment and the 15th lease payment?

Solution:

For December 31, 2025 (5th lease payment):

We need to calculate the annual lease payment which increases by $850 per year.

Using the formula: $18,250 + ($850 * 4) = $21,600

Record as follows:

Debit: Lease Expense $21,600

Credit: Cash $21,600

For December 31, 2035 (15th lease payment):

Similar calculation: $18,250 + ($850 * 14) = $30,350

Record as follows:

Debit: Lease Expense $30,350

Credit: Cash $30,350

These journal entries reflect the payment of the lease expense on the respective dates. The benefits from using the office space are expected to stay constant throughout the lease term.

Detail Explanation:

Lease payments for Sweetwater Furniture Company are treated as an expense in operating lease agreements. The annual lease payments increase by $850 per year.

For the 5th lease payment on December 31, 2025, the calculation is $18,250 + ($850 * 4) = $21,600.

Similarly, for the 15th lease payment on December 31, 2035, the calculation is $18,250 + ($850 * 14) = $30,350.

By recording these payments as expenses (debiting Lease Expense) and cash (crediting Cash), Sweetwater Furniture Company maintains accurate financial records.

This approach ensures transparency and compliance with accounting standards while reflecting the benefits derived from the leased office space.