Sure! Let’s break down the solution in **3 steps** with explanations after each step. The problem is about recording the initial lease liability under ASC 842 for a finance lease, using present value factors. Let's proceed: --- ### **Step 1: Identify Lease Payments and Discount Rate** **Explanation:** First, determine the annual lease payments and the discount rate to use for present value calculations. From the image: - **Annual lease payments:** $2,000,000 each year (paid at the beginning of each year). - **Lease term:** 10 years. - **Discount rate:** 6% (incremental borrowing rate). --- ### **Step 2: Calculate Present Value of Lease Payments** **Explanation:** Since payments are made at the **beginning** of each period, use the present value of an **annuity due**. According to the given table: - **PV factor for annuity due, 10 periods at 6%:** 8.5820 So, PV of lease payments = $2,000,000 × 8.5820 = **$17,164,000** --- ### **Step 3: Prepare Initial Journal Entry** **Explanation:** At lease commencement (January 1, 2023), record the right-of-use asset and lease liability at the present value calculated above. Since the first payment is made immediately, the lease liability is reduced by that payment: - **Right-of-use Asset:** $17,164,000 (Debit) - **Lease Liability:** $17,164,000 (Credit) - **Cash (first payment):** $2,000,000 (Credit) - **Lease Liability (reduce):** $2,000,000 (Debit) **Journal Entry:** | Account Titles | Debit | Credit | |-----------------------|------------|-------------| | Right-of-use Asset | 17,164,000 | | | Lease Liability | | 17,164,000 | | Lease Liability | 2,000,000 | | | Cash | | 2,000,000 | --- ## **Final Answer:** The initial journal entry is: - **Debit** Right-of-use Asset $17,164,000 - **Credit** Lease Liability $17,164,000 Then: - **Debit** Lease Liability $2,000,000 - **Credit** Cash $2,000,000 This reflects the recognition of the asset and liability at present value, and the payment made at the start of the lease.