Chapter 21 - Lease Example 2

Chapter 21 - Lease Example 2 - Lease Liability Lease...

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Lease Example 2 (Adapted from Norton et al 2007) Symonds has agreed to lease a depreciable asset from another party. The provisions of the lease contract are as follows: Date of inception of the lease January 1, 2005 Lease term 6 years Useful life of the asset 9 years Fair value of asset at lease inception $800,000 Incremental borrowing rate 14% Implicit borrowing rate 12% Annual rental payments of $162,730 are due on January 1 of each lease year. At the end of the lease term, the equipment reverts to the lessor. The two parties have agreed that the asset will be worth $100,000, but Symonds has not guaranteed that amount. Assume that the straight-line method of depreciation is used when necessary and that the asset will have zero residual value at the end of its useful life. Required How should this lease be classified? Provide the journal entries recorded at: 1. at the time of each of the payment dates. 2. at the end of each year.
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Lease Example 2 Journal Entries January 1, 2005 Leased Equipment under Capital Lease
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Unformatted text preview: Lease Liability Lease Liability Cash December 31, 2005 Interest Expense Interest Payable Depreciation Expense Accumulated Depreciation January 1, 2006 Lease Liability Interest Payable Cash December 31, 2006 Interest Expense Interest Payable Depreciation Expense Accumulated Depreciation January 1, 2007 Lease Liability Interest Payable Cash December 31, 2007 Interest Expense Interest Payable Depreciation Expense Accumulated Depreciation January 1, 2008 Lease Liability Interest Payable Cash December 31, 2008 Interest Expense Interest Payable Depreciation Expense Accumulated Depreciation January 1, 2009 Lease Liability Interest Payable Cash December 31, 2009 Interest Expense Interest Payable Depreciation Expense Accumulated Depreciation January 1, 2010 Lease Liability Interest Payable Cash December 31, 2010 Interest Expense Interest Payable Depreciation Expense Accumulated Depreciation Accumulated Depreciation Leased Equipment under Capital Lease...
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Chapter 21 - Lease Example 2 - Lease Liability Lease...

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