Chapter 21, Problem 8E

To determine

Lease: A contractual arrangement between the owner of the asset and the user of the asset for a fixed amount of money is termed lease. In this contract the owner of the asset permits the user to use the property for a fixed sum of money received at the time of handing over the asset. At the end of the contract tenure the user of the asset need to return the asset to the owner. The parties involved in the contract are termed the lessor the owner of the asset and the lessee the user of the asset.

(a)

To determine the type of lease for R Company.

To determine

(b)

To determine the type of lease for M Company.

To determine

(c)

To prepare: To prepare the amortization schedule of lease.

To determine

(d)

To record: To record the journal in the book of R.

Compute the depreciation for 2017.

$\begin{array}{ccc}\text{Depreciation 2017}& =& \frac{\text{Value of lease}}{\text{Life of the asset}}\times \frac{8}{12}\\ & =& \frac{\$91,000}{10\text{ years}}\times \frac{8}{12}\\ & =& \$6,066.67\end{array}$

Then compute the depreciation for 2018.

$\begin{array}{ccc}\text{Depreciation 2017}& =& \frac{\text{Value of lease}}{\text{Life of the asset}}\\ & =& \frac{\$91,000}{10\text{ years}}\\ & =& \$9,100\end{array}$