Concept explainers
Operating Lease, Rate or Index, Effect of Variable Lease Payments, Lessee. Caye Comfort, Inc. manufactures a complete line of beds, cots, and futons. Caye Comfort leases a spring fabricating machine from Stein Spring Company for 3 years with no renewal or purchase options. The equipment has a fair value of $10,000 and title will be retained by the lessor at the end of the lease term. The economic life of the equipment is 6 years. The implicit rate in the lease is 5%.
The lessee pays all maintenance to a third party and there are no initial direct costs. There are no incentives offered by the lessor. The first annual payment is $1,300 (due January 1, Year 1). and the payment increases each year by an amount equal to $1.300 multiplied by the Producers Price Index (PPI) The PPI on the lease commencement date is 1 00 and is
Required
- a. Determine the proper classification of the lease for the lessee.
- b. Prepare the
journal entries and supporting amortization tables to account for this agreement for the lessee over the lease term
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