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