This preview shows pages 1–3. Sign up to view the full content.

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 5,602 Accumulated Depreciation 5,602 Since it is not an OT or BPO, we depreciate the asset over the life of the lease itself, four years. One-quarter of this is recognized in 2005, as the asset is owned only one-quarter of the year.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
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.
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern