26. Python Company leased equipment from Hope Leasing on January 1, 2013. Hope p

Question

26. Python Company leased equipment from Hope Leasing on January 1, 2013. Hope purchased the equipment at a cost of $222,664.

Other information:

lease term : 3years

Annual payments 80,000 on jan 1 each year

life of asset 3 years

fair value of asset 222,664

implicit interest rate 8%

incremental rate 8%

There is no expected residual value.

Required:

Prepare appropriate journal entries for Python for 2013. Assume straight-line depreciation and a December 31 year-end.

Explanation / Answer

First, we should recognize whether it ia Capital lease or Operating lease It is capital lease, if it mets any of the conditions: 1. Assets ownership transfferd to the lessee upon agreement's maturation. Since ther is no such agreement between the Python Co. and Hope, so this condition is not met. 2. The lesse is given the of purchasing the assets upon the agreement maturation. This condition is also not met. 3. The term of lease agreement is greater tham 75% of asset's useful life. This condition is met, since equipment life is 3 years and lease agreement is of 3 years 4. PV of future rent is equal to or greater than90% of market value of asssets. This coindition is also met since Rent paid ($240000)> Market Vale of assets ($ 222664). So , the Lease agreement will be treated as capital Lease. Capital Lease Accounting - Interest Charges Opening Interest 8% Payment Closing Year 0 222664 0 80000 142664 Year 1 142664 11413 80000 74077 Year 2 74077 5923 80000 0 Depreciation Amount (Straight Line Method) = $222664 (Value of Equiment) / 3 (Life of Assets)                                                                                              = 74221.33 or $74221 per annum Journal Entries In Books of Python Ltd. Jan-01 Equipment A/c                                                      Dr. 222664      To Lease Liability 222664 (Being the Capital lease of the equipment made) Jan-01 Lease Liability A/c                                              Dr. 80000          To Cash A/c 80000 Dec-31 Depreciation A/c                                                 Dr.      To Accumulated Depreciation A/c 74221 (Being the Deprecaition charged) 74221

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