ORIE_3150_Homework__5_Solutions - ORIE 3150 Homework #5 Due...

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ORIE 3150 Homework #5 Due October 21, 2008 1. Watson Corp. finds that they cannot afford to purchase a new material handling system, so they decide to lease it. The fair market value of the system is $90,000. The estimated useful life of the system is 5 years and it has a salvage value of zero. There is neither a bargain purchase option nor an ownership transfer associated with the lease. Watson Corp. signs a lease contract on Oct. 1, 2005 agreeing to pay $7,000 quarterly for 16 quarters (four years) commencing Dec. 31, 2005. Watson Corporation’s annual interest rate is 11%. Show the journal entries needed for Watson Corp’s records for Oct. 1, 2005, and Dec. 31, 2005. Watson uses the actual date method for depreciation, and only records depreciation at the end of each fiscal year. Watson’s fiscal year end is December 31. 1. OT? No 2. BPO? No 3. >75% useful life? Yes 4. >90% value? Yes ( 29 01 . 632 , 89 $ 1 1 = + - = - i i A PV n Therefore, it is a capital lease. Oct. 1, 2005 Leased Asset 89,632 Lease Obligation 89,632 Dec. 31, 2005 Interest Expense 2,465 Lease Obligation 4,535 Cash 7,000 Dec. 31, 2005 Depreciation Expense 22,408 Accumulated Depreciation 22,408 Since it is not an OT or BPO, we depreciate the asset over the life of the lease itself, four years.
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2. Zagnut Industries finds itself with a need for a new packaging machine for its candy products. They prefer to lease the asset. The company finds that the market value for the equipment is $211,600. They find that the economic life of the asset is 10 years with no expected salvage value. Since the equipment is specialized and requires installation, the
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ORIE_3150_Homework__5_Solutions - ORIE 3150 Homework #5 Due...

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