On 1/1/14, ABC Corporation signed a 5-year noncancelable lease for a delivery ve
ID: 2571760 • Letter: O
Question
On 1/1/14, ABC Corporation signed a 5-year noncancelable lease for a delivery vehicle. The terms of the lease called for ABC to Corporation to make annual payments of $10,503 at the beginning of each year, starting January 1, 2014. The delivery vehicle has an estimated useful life of 6 years and a $7,000 unguaranteed residual value. The delivery vehicle reverts back to the lessor at the end of the lease term. ABC Corporation uses the straight-line method of depreciation for the delivery vehicle. ABC Corporation's incremental borrowing rate is 10%, and the Lessor's implicit rate is unknown. No entries have yet been made concerning this lease arrangement. After determining the type of lease arrangement (capital or operating), prepare the necessary multiple-part journal entry for 2014 for ABC Corporation. (Hints: You will need to compute the present value of the minimum lease payments and 4 separate sub-entries for this lease transaction. Also, for Statement of Cash Flow purposes, the principal portion of lease payments are correctly categorized as a financing activity.)
I am missing something: Please help!
I calculated this to be a capital lease. 5/6*100=83.33%
Annual payments 10,503
PV of annuity due 4.16987 (10,503 X 4.16987) = 43,796
43,796-10,503 = 33,293 outstanding
33,293*10% = 3,329 interest
Depreciation?
Explanation / Answer
This is a capital lease and the above calculation done by you is correct.
Depreciation per year = $43796/ 5 = $8759
Journal
Date Account Name Debit Credit 1/1/14 Vehicle on lease 43796 Lease liability 43796 (To record lease asset and liability) 1/1/14 Lease liability 10503 Cash 10503 (To record payment of first installment) 12/31/14 Interest expense 3329 Interest payable 3329 (To record interest expense) 12/31/14 Depreciation expense 8759 Accumulated depreciation-Vehicle 8759 (To record depreciation expense)Related Questions
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