Lessee Accounting with Payments Made at Beginning of Year Adden Company signs a lease agreement dated January 1, 2016, that provides for it to lease heavy equipment from Scott Rental Company beginning January 1, 2016. The lease terms, provisions, and related events are as follows: 1. The lease term is 4 years. The lease is noncancelable and requires annual rental payments of $20,000 to be paid in advance at the beginning of each year. 2. The cost, and also fair value, of the heavy equipment to Scott at the inception of the lease is $68,036.62. The equipment has an estimated life of 4 years and has a zero estimated residual value at the end of this time. 3. Adden agrees to pay all executory costs. 4. The lease contains no renewal or bargain purchase option. 5. Scott's interest rate implicit in the lease is 12%. Adden is aware of this rate, which is equal to its borrowing rate. 6. Adden uses the straight-line method to record depreciation on similar equipment. 7. Executory costs paid at the end of the year by Adden are: 2016 Insurance, $1,500 Property taxes, $6,000 Required: 2017 1. Insurance, $1,300 Property taxes, $5,500 Next Level Examine and evaluate each capitalization criteria and determine what type of lease this is for Adden. 2. Prepare a table summarizing the lease payments and interest expense for Adden. 3. Prepare journal entries for Adden for the years 2016 and 2017.
Lessee Accounting with Payments Made at Beginning of Year Adden Company signs a lease agreement dated January 1, 2016, that provides for it to lease heavy equipment from Scott Rental Company beginning January 1, 2016. The lease terms, provisions, and related events are as follows: 1. The lease term is 4 years. The lease is noncancelable and requires annual rental payments of $20,000 to be paid in advance at the beginning of each year. 2. The cost, and also fair value, of the heavy equipment to Scott at the inception of the lease is $68,036.62. The equipment has an estimated life of 4 years and has a zero estimated residual value at the end of this time. 3. Adden agrees to pay all executory costs. 4. The lease contains no renewal or bargain purchase option. 5. Scott's interest rate implicit in the lease is 12%. Adden is aware of this rate, which is equal to its borrowing rate. 6. Adden uses the straight-line method to record depreciation on similar equipment. 7. Executory costs paid at the end of the year by Adden are: 2016 Insurance, $1,500 Property taxes, $6,000 Required: 2017 1. Insurance, $1,300 Property taxes, $5,500 Next Level Examine and evaluate each capitalization criteria and determine what type of lease this is for Adden. 2. Prepare a table summarizing the lease payments and interest expense for Adden. 3. Prepare journal entries for Adden for the years 2016 and 2017.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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J4.
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Transcribed Image Text:Lessee Accounting with Payments Made at Beginning of Year
Adden Company signs a lease agreement dated January 1, 2016, that provides for it to lease heavy equipment from Scott
Rental Company beginning January 1, 2016. The lease terms, provisions, and related events are as follows:
1. The lease term is 4 years. The lease is noncancelable and requires annual rental payments of $20,000 to be paid in
advance at the beginning of each year.
2.
3.
Adden agrees to pay all executory costs.
The lease contains no renewal or bargain purchase option.
5. Scott's interest rate implicit in the lease is 12%. Adden is aware of this rate, which is equal to its borrowing rate.
6.
Adden uses the straight-line method to record depreciation on similar equipment.
7. Executory costs paid at the end of the year by Adden are:
4.
The cost, and also fair value, of the heavy equipment to Scott at the inception of the lease is $68,036.62. The
equipment has an estimated life of 4 years and has a zero estimated residual value at the end of this time.
2016
Insurance, $1,500
Property taxes, $6,000
Required:
1.
3.
2017
Next Level Examine and evaluate each capitalization criteria and determine what type of lease this is for Adden.
2. Prepare a table summarizing the lease payments and interest expense for Adden.
Prepare journal entries for Adden for the years 2016 and 2017.
Insurance, $1,300
Property taxes, $5,500
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