AMO Company leased a machine on July 1, 2010, under a 10-Year lease. The Economi

Question

AMO Company leased a machine on July 1, 2010, under a 10-Year lease. The
Economic Life of the machine is estimated to be 15 Years. Title to the machine passes to AMO Company at the expiration of the lease, and thus, the lease is a Capital Lease. The lease payments are $97,000 per year, including Executory Costs of $3,000
per year, all payable in advance annually. The incremental borrowing rate of the company is 9%, and the lessor's implicit interest rate is unknown. Extractor Company uses, the straight-line method of amortization and the calendar year for reporting purposes.


Q - Give all Entries on the books of the lessee relating to the lease for 2010.

Explanation / Answer

Journal Entries on the books of the lessee relating to the lease for 2010 Date Details Debit Credit Jan 1,2010 Leased Equipment under Capital Leases $97,000         Lease Liability 97,000 (To record the obligation of lease amount) Jan 1,2010 Property Tax Expense $3,000 Lease Liability 94,000 Cash 97,000 (To record the first lease payment) 31-Dec-10 Interest Expense 8,460      Inteterest payable 8,460 (To record interest expense) Dec 31,2010 Depreciation Expense 9,400     Accumulated Depreciation 9,400 (To record depreciation expense) Jan 1,2011 Property Tax Expense 3,000 Interest Expense 8,460 Lease Liability 82,540        Cash 94,000 (To record the lease payment)

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