Lessee accounting Eubank Company, as lessee, enters into a lease agreement on Ju

Question

Lessee accounting Eubank Company, as lessee, enters into a lease agreement on July 1, 2014, for equipment. The following data are relevant to the lease agreement:

1. The term of the noncancelable lease is 4 years, with no renewal option. Payments of $782,757 are due on July 1 of each year.

2. The fair value of the equipment on July 1, 2014 is $2,800,000. The equipment has an economic life of 6 years with no salvage value.

3. Eubank depreciates similar machinery it owns on the sum-of-the-years'-digits basis.

4. The lessee pays all executory costs.

5. Eubank's incremental borrowing rate is 10% per year. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease payments (present value factor for 4 periods at 8%, 3.57710; at 10%, 3.48685.

Instructions (a) Indicate the type of lease Eubank Company has entered into and what accounting treatment is applicable.

(b) Prepare the journal entries on Eubank's books that relate to the lease agreement for the following dates: (Round all amounts to the nearest dollar. Include a partial amortization schedule.)

1. July 1, 2014.

2. December 31, 2014.

3. July 1, 2015.

4. December 31, 2015.

Explanation / Answer

(a)

Present value of the lease is calculated as under:

Yearly payments *PV factor of 8% for 4 years

= $782,757* 3,57710

= $2,800,000

As the present value of the lease is equal to the value of equipment so this lease is a Capital Lease.

Capital lease accounting will be used in this type of lease.

(b)

Journal entries are recorded as under:

Date Particulars L.F Amount ($) Amount ($) 2014 Jul-01 Leased Equipment 28,00,000    Lease liability 20,17,243    Cash 7,82,757 (For equipment taken on lease) Dec-31 Depreciation 5,60,000    Accumulated dep-Capital laese 5,60,000 (For half yearly depreciation recorded) 2,800,000*4/10 *6/12 Dec-31 Interest expense 80,690    Interest Payable 80,690 (For interest expense recorded) 161,379*6/12 2015 Jul-01 Interest expense 1,61,379 Lease liability 6,21,378    Cash 7,82,757 (For instalment paid) Dec-31 Depreciation 9,80,000    Accumulated dep-Capital laese 9,80,000 (For half yearly depreciation recorded) 2,800,000*4/10 *6/12 2,800,000*3/10 *6/12 Dec-31 Interest expense 55,835    Interest Payable 55,835 (For interest expense recorded) 111,669*6/12

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.