Required: 1. Determine whether this is a capital lease or an operating lease. Se

Question

Required:

1. Determine whether this is a capital lease or an operating lease.
SelectCapital leaseOperating leaseCorrect 1 of Item 1

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Solution

2. Regardless of your answer to the preceding question, assume that this is a capital lease and that the present value of the lease payments is $611,783. Record the liability and corresponding asset for this acquisition.

Correct 2 of Item 2

Correct 3 of Item 2

Correct 4 of Item 2

Correct 5 of Item 2

Record capital lease

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Solution

3. Record the interest expense on the capital lease at the end of the first year. Also assume no residual value and a 10-year lease for the building. Record the first year's straight-line depreciation of the cost of the leased asset. (Note: Round to the nearest dollar.) For a compound journal entry, if an amount box does not require an entry, leave it blank.

Accumulated Depreciation

Depreciation Expense

Interest Expense

Interest Payable

Leased Assets

Correct 2 of Item 3

Correct 3 of Item 3

Correct 4 of Item 3

Cash

Depreciation Expense

Interest Payable

Lease Liability

Leased Assets

Correct 5 of Item 3

Correct 6 of Item 3

Correct 7 of Item 3

Cash

Depreciation Expense

Interest Expense

Lease Liability

Leased Assets

Correct 8 of Item 3

Correct 9 of Item 3

Correct 10 of Item 3

Record capital lease payment

Accumulated Depreciation

Depreciation Expense

Interest Expense

Interest Payable

Lease Liability

Correct 13 of Item 3

Correct 14 of Item 3

Accumulated Depreciation

Depreciation Expense

Interest Expense

Interest Payable

Lease Liability

Correct 15 of Item 3

Correct 16 of Item 3

Record depreciation expense

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2. Regardless of your answer to the preceding question, assume that this is a capital lease and that the present value of the lease payments is $611,783. Record the liability and corresponding asset for this acquisition.

Correct 2 of Item 2

Correct 3 of Item 2

Correct 4 of Item 2

Correct 5 of Item 2

Record capital lease

Explanation / Answer

Lease conditions Yr Lease Payment PV factor @5.2% PV of Lease Payment   Review                      1           80,000           0.951        76,046                      2           80,000           0.904        72,287                      3           80,000           0.859        68,714                      4           80,000           0.816        65,317                      5           80,000           0.776        62,089                      6           80,000           0.738        59,020                      7           80,000           0.701        56,102                      8           80,000           0.667        53,329                      9           80,000           0.634        50,693                    10           80,000           0.602        48,187 Total      611,783 PV of Lease payment as % of asset 98.67%                    -   1. Lease term is more than 75% of Asset life 2. PV of lease payments> 90% of Asset fair value. So this is a Capital Lease. Asset value and Lease obligation=         611,783 Assuming asset life in years                    12 SL depreciation per year=           50,982 Interest @5.2% in First year=           31,813 Lease liability epaid 1st year           48,187 Journal Entry   Account Title Dr $ Cr $ Lease Liability           48,187 Interest Expense           31,813 Cash           80,000 ( Lease payment recording) Depreciation Expense           50,982 Accumulated Depreciation           50,982 (recording depreciation)

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