On January 1, 2022, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of $120,987 at the beginning of each year, starting January 1, 2022. The leased equipment is to be capitalized at $550,000. The asset is to be amortized on a straight-line basis, and the obligation is to be reduced on an effective-interest basis. Cage's incremental borrowing rate is 6%, and the company knows that the implicit rate in the lease is 5%. Title to the equipment transfers to Cage at the end of the lease. The asset has an estimated useful life of 8 years and no residual value. Instructions a. Explain the probable relationship of the $550,000 amount to the lease arrangement. b. Prepare the journal entry or entries that Cage should record on January 1, 2022. c. Prepare the journal entries to record depreciation of the leased asset and interest expense for the year 2022. d. Prepare the journal entry to record the lease payment of January 1, 2023, assuming reversing entries are not made. e. What amounts will appear on the lessee's December 31, 2022, statement of financial position relative to the lease contract?

On January 1, 2022, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of $120,987 at the beginning of each year, starting January 1, 2022. The leased equipment is to be capitalized at $550,000. The asset is to be amortized on a straight-line basis, and the obligation is to be reduced on an effective-interest basis. Cage's incremental borrowing rate is 6%, and the company knows that the implicit rate in the lease is 5%. Title to the equipment transfers to Cage at the end of the lease. The asset has an estimated useful life of 8 years and no residual value. Instructions a. Explain the probable relationship of the $550,000 amount to the lease arrangement. b. Prepare the journal entry or entries that Cage should record on January 1, 2022. c. Prepare the journal entries to record depreciation of the leased asset and interest expense for the year 2022. d. Prepare the journal entry to record the lease payment of January 1, 2023, assuming reversing entries are not made. e. What amounts will appear on the lessee's December 31, 2022, statement of financial position relative to the lease contract?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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