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.)

What type of lease is this for the lessee? What is your rationale?

Prepare a lease amortization table for 2020 and 2021.
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

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 1 year ago

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