Question

Question # 6 Erica Corp., who reports under ASPE, leases machinery on January 1, 2020, and records this as a capital lease. Seven annual lease payments of $ 140,000 are required the end of each year, starting December 31, 2020. The present value of the lease payments are calculated using 10%. Title passes to Erica at the end of the lease. Erica uses the effective interest method of amortization for the lease. The company uses straight-line depreciation. The equipment’s expected useful life of eight years, with no residual value. Instructions (Round values to the nearest dollar.) a. What type of lease is this for the lessee? What is your rationale? a. Prepare a lease amortization table for 2020 and 2021. b. Prepare the general journal entries relating to this lease for 2020.

Answer 1

1	The present value of the lease payments	$681,576
	($140,000 x 4.8684)
2	Date	Payment	10% Interest	Reduction Obligation	Lease Obligation
	Jan 1, 2020				$681,576
	Dec 31, 2020	$140,000	$68,158	$71,842	$609,734
	Dec 31, 2021	$140,000	$60,973	$79,027	$530,707
	Dec 31, 2022	$140,000	$53,071	$86,929	$443,778
	Dec 31, 2023	$140,000	$44,378	$95,622	$348,155
	Dec 31, 2024	$140,000	$34,816	$105,184	$242,971
	Dec 31, 2025	$140,000	$24,297	$115,703	$127,268
	Dec 31, 2026	$140,000	$12,732	$127,268	$0
3
Date	Account Titles and Explanation	Debit	Credit
Jan 1, 2020	Equipment under Capital Leases	$681,576
	Obligations under Capital Leases		$681,576
Dec 31, 2020	Interest Expense	$68,158
	Obligations under Capital Leases	$71,842
	Cash		$140,000
Dec 31, 2020	Depreciation Expense	$85,197		($681,576 / 8 years)
	Accumulated Depreciation - Machinery		$85,197