Chapter 21 Examples 1. On January 1, 2011, Yancey, Inc. signs a 5-year non-cancelable lease agreement to rent a machine from Holt Equipment Company. The following information pertains to this lease agreement: • The agreement requires equal rental payments at the end of each year. • The fair value of the equipment on January 1, 2011 is $3,000,000. • The equipment has an estimated useful life of 8 years but, at the end of the lease term, the equipment’s expected residual value is $250,000. Yancey uses straight-line depreciation. • Title to the equipment is retained by the lessor, Holt. • Yancey's incremental borrowing rate is 9% per year. The implicit rate used by Holt in the lease is 8% and that rate is known by Yancey a. What is the amount of the annual lease payment? b. Is this an operating or capital lease for Yancey? c. Record the journal entries for the first year for Yancey (i.e. 2011).
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