Question

In: Accounting

Erica Corp., who reports under ASPE, leases machinery on January 1, 2020, and records this as...

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.)

  1. What type of lease is this for the lessee?  What is your rationale?
  1. Prepare a lease amortization table for 2020 and 2021.
  2. Prepare the general journal entries relating to this lease for 2020.

Solutions

Expert Solution

1. To be classified as a capital lease, any one of four conditions must be met:

  • A transfer of ownership of the asset at the end of the term
  • An option to purchase the asset at a discounted price at the end of the term
  • The term of the lease is greater than or equal to 75% of the useful life of the asset
  • The present value of the lease payments is greater than or equal to 90% of the asset’s fair market value

The third condition has been met by this particular problem Lease life = 7 years/8 years = 87.50% Thus it is a capital lease.

2. Present Value of Lease Payments = Lease Payment * PVAF(10%,7)

Present Value of Lease Payments =$140000 * 4.8684

Present Value of Lease Payments = $681579

c.

Date General Journal Debit Credit
Jan 1 2020 Lease Receivable $681579
Machinery $681579
Dec 31 2020 Cash $140000
Interest Revenue $68158
Lease Receivable $71842

ekkarill92 answered 2 years ago
Next > < Previous

Related Solutions

Question # 6 Erica Corp., who reports under ASPE, leases machinery on January 1, 2020, and...
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...
Blossom Incorporated leases a piece of machinery to Pina Company on January 1, 2020, under the...
Blossom Incorporated leases a piece of machinery to Pina Company on January 1, 2020, under the following terms. 1. The lease is to be for 4 years with rental payments of $15,557 to be made at the beginning of each year. 2. The machinery’ has a fair value of $81,480, a book value of $60,800, and an economic life of 10 years. 3. At the end of the lease term, both parties expect the machinery to have a residual value...
Sunland Incorporated leases a piece of machinery to Culver Company on January 1, 2020, under the...
Sunland Incorporated leases a piece of machinery to Culver Company on January 1, 2020, under the following terms. 1. The lease is to be for 4 years with rental payments of $14,999 to be made at the beginning of each year. 2. The machinery’ has a fair value of $78,692, a book value of $58,720, and an economic life of 10 years. 3. At the end of the lease term, both parties expect the machinery to have a residual value...
Crane Incorporated leases a piece of machinery to Blue Company on January 1, 2020, under the...
Crane Incorporated leases a piece of machinery to Blue Company on January 1, 2020, under the following terms. 1. The lease is to be for 4 years with rental payments of $13,046 to be made at the beginning of each year. 2. The machinery’ has a fair value of $68,934, a book value of $51,440, and an economic life of 10 years. 3. At the end of the lease term, both parties expect the machinery to have a residual value...
Sunland Incorporated leases a piece of machinery to Culver Company on January 1, 2020, under the...
Sunland Incorporated leases a piece of machinery to Culver Company on January 1, 2020, under the following terms. 1. The lease is to be for 4 years with rental payments of $12,488 to be made at the beginning of each year. 2. The machinery’ has a fair value of $66,146, a book value of $49,360, and an economic life of 10 years. 3. At the end of the lease term, both parties expect the machinery to have a residual value...
Crane Incorporated leases a piece of machinery to Blue Company on January 1, 2020, under the...
Crane Incorporated leases a piece of machinery to Blue Company on January 1, 2020, under the following terms. 1. The lease is to be for 4 years with rental payments of $13,325 to be made at the beginning of each year. 2. The machinery’ has a fair value of $70,328, a book value of $52,480, and an economic life of 10 years. 3. At the end of the lease term, both parties expect the machinery to have a residual value...
Ivanhoe Corp., which uses ASPE, leases a car to Jaimme DeLory on June 1, 2020. The...
Ivanhoe Corp., which uses ASPE, leases a car to Jaimme DeLory on June 1, 2020. The term of the non-cancellable lease is 48 months. The following information is provided about the lease. 1. The lessee is given an option to purchase the automobile at the end of the lease term for $5,400. 2. The automobile’s fair value on June 1, 2020, is $30,100. It is carried in Ivanhoe’s inventory at $20,600. 3. The car has an economic life of seven...
Information on Bramble Corp., which reports under ASPE, follows: July 1 Bramble Corp. sold to Cullumber...
Information on Bramble Corp., which reports under ASPE, follows: July 1 Bramble Corp. sold to Cullumber Company merchandise having a sales price of $8,800, terms 3/10, n/60. Bramble records its sales and receivables net. 3 Cullumber Company returned defective merchandise having a sales price of $700. 5 Accounts receivable of $18,300 (gross) are factored with Ayayai Corp. without recourse at a financing charge of 8%. Cash is received for the proceeds and collections are handled by the finance company. (These...
Huffy Co., a lessee, records a finance lease of machinery on January 1, 2020. The five...
Huffy Co., a lessee, records a finance lease of machinery on January 1, 2020. The five annual lease payments of $525,000 are made at the beginning of each year. The present value of the lease payments at 10% is $2,189,180. Huffy uses straight-line depreciation with no salvage value.     Prepare an amortization table for the life of the lease. Round all amounts to the nearest dollar. Amortization Table Lease Liability Lease payment Interest Principal 2020 2021 2022 2023 2024 b. Prepare...
Metlock Company purchased machinery on January 1, 2020, for $88,000. The machinery is estimated to have...
Metlock Company purchased machinery on January 1, 2020, for $88,000. The machinery is estimated to have a salvage value of $8,800 after a useful life of 8 years. New attempt is in progress. Some of the new entries may impact the last attempt grading.Your answer is incorrect. Compute 2020 depreciation expense using the double-declining-balance method. Depreciation expense $enter Depreciation expense in dollars eTextbook and Media       New attempt is in progress. Some of the new entries may impact the...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT