Presentation) On January 1, 2022, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of $12o,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 double-declining-balance 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 5 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
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P21.2 (LO 2, 4) (Lessee Entries and Statement of Financial Position
Presentation) 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 double-declining-balance 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 5 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?
Transcribed Image Text:P21.2 (LO 2, 4) (Lessee Entries and Statement of Financial Position Presentation) 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 double-declining-balance 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 5 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?
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