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SawPro Company, owned and operated by Heather Moore, opened for business in 2015. The company sells...

SawPro Company, owned and operated by Heather Moore, opened for business in 2015. The company sells a single model of commercial grade chain saws that it purchases from the manufacturer. Heather’s customers, primarily businesses offering landscaping and tree-services, purchase saws on account, with payment typically due within thirty-days.  

The following transactions occurred during the calendar year ending December 31, 2018:

  1. Acquired equipment that automated sharpening chain saw blades. Instead of paying cash, Heather signed an agreement with a lease financing company. The equipment was delivered, installed, and ready for service on March 1, 2018. Terms of the lease require twenty-four equal monthly payments of $270, with the first payment due at signing on March 1st. The annual rate is 4.75 percent. Heather made all payments on the dates required. The fair value of the equipment is $6,500 with an expected service life of thirty months. Heather has the option to purchase the equipment for $250 at the end of the lease term; she expects to exercise that option. (Note: use the old rule percent’s to determine whether the lease is financing or operating).

Post a journal entry of this transaction!

Solutions

Expert Solution

The given lease is a finance lease on the following grounds-

a) the leased equipment reverts back to the lessee at the option of the lessee at the end of lease term.
b) the present value of lease payments made to the lessor is substantially equal to the fair value of the equipment on the date of purchase of equipment.

ekkarill92 answered 5 months ago
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