On June 30, 2013, Blue, Inc., leased a machine from Big Leasing Corporation. The

Question

On June 30, 2013, Blue, Inc., leased a machine from Big Leasing Corporation. The lease agreement qualifies as a capital lease and calls for Blue to make semiannual lease payments of $281,454 over a three-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2013. Blue's incremental borrowing rate is 10%, the same rate Big uses to calculate lease payment amounts. Depreciation is recorded on a straight-line basis at the end of each fiscal year. Prepare journal entries for Blue, Inc. for 2013 and 2014, including any necessary adjusting journal entries. Prepare journal entries for Big-Leasing Corporation for 2013 and 2014, including any necessary adjusting journal entries. What would be the pretax amounts related to the lease and asset that Blue would report in its balance sheet at December 31, 2014? What would be the pretax amounts related to the lease and asset that Blue would report in its income statement for the year ended December 31, 2014?

Explanation / Answer

Blue reports asset as at 31 Dec,2014= 93818

Blue reports lease liability as at 31 Dec,2014= 147640.7

in books of Blue inc Year 1 30-Jun-13 31-Dec-13 30-Jun-14 31-Dec-14 Machine 281454 0 0 0 To Lease Payable 281454 0 0 0 Lease Payable   Dr 281454 42446.73 44569.07 46797.52 Interest Expense Dr 0 11727.25 9604.914 7376.4602    To Cash 46909 54173.98 54173.98 54173.98 Depreciation    Dr 46909 46909 46909 46909 To Computer 46909 46909 46909 46909 in books of Big leasing corporation Lease receivable 281454 0 0 0    To Machine 281454 0 0 0 Cash 46909 54173.98 54173.98 54173.98 To Unearned interest revenue
0 11727.25 9604.914 7376.46    To lease receivable 281454 42446.73 44569.07 46797.52

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