Chapter 20, Problem 3E

Lessee Accounting Issues Sax Company signs a lease agreement dated January 1, 2019, that provides for it to lease computers from Appleton Company beginning January 1, 2019. The lease terms, provisions, and related events are as follows:

1. 1. The lease term is 5 years. The lease is noncancelable and requires equal rental payments to be made at the end of each year. The computers are not specialized for Sax.
2. 2. The computers have an estimated life of 5 years, a fair value of $300,000, and a zero estimated residual value.
3. 3. Sax agrees to pay all executory costs directly to a third party.
4. 4. The lease contains no renewal or bargain purchase options.
5. 5. The annual payment is set by Appleton at $83,222.92 to earn a rate of return of 12% on its net investment. Sax is aware of this rate. Sax’s incremental borrowing rate is 10%.
6. 6. Sax uses the straight-line method to record depreciation on similar equipment.

Required:

1. 1. Next Level Examine and evaluate each capitalization criteria and determine what type of lease this is for Sax.
2. 2. Calculate the amount of the asset and liability of Sax at the inception of the lease (round to the nearest dollar).
3. 3. Prepare a table summarizing the lease payments and interest expense.
4. 4. Prepare journal entries for Sax for the years 2019 and 2020.