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On January 1, 2020, Cage Company contracts to lease equipment for 5 years, agreeing to make...

On January 1, 2020, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of $120,987 at the beginning of each year, starting January 1, 2020. The leased equipment is to be capitalized at $550,000. The asset is to be amortized on a double-declining-balance basis, and the obligation is to be reduced on an effective-interest basis. Cage’s incremental borrowing rate is 6%, and the implicit rate in the lease is 5%, which is known by Cage. Title to the equipment transfers to Cage at the end of the lease. The asset has an estimated useful life of 5 years and no residual value.

a/ Prepare the journal entries that Cage should record on January 1, 2020.

b/ Prepare the journal entries to record amortization of the leased asset and interest expense for the year 2020.

c/ Prepare the journal entry to record the lease payment of January 1, 2021, assuming reversing entries are not made

d/ What amounts will appear on the lessee’s December 31, 2020, balance sheet relative to the lease contract?

e/ How would the value of the lease liability in part b change if Cage also agreed to pay the fixed annual insurance on the equipment of $2,000 at the same time as the rental payments?

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ekkarill92 answered 1 year ago
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