Question 28 (16 points) Howard Company, as lessee, enters into a lease agreement
ID: 2486726 • Letter: Q
Question
Question 28 (16 points) Howard Company, as lessee, enters into a lease agreement on January 1, 2015, for equipment. The following data are relevant to the lease agreement: 1. The term of the non-cancelable lease is 4 years, with no renewal option and no bargain purchase option. Title to the equipment will not pass to Howard. 2. Payments of $126,807 are due on December 31st of each year. The equipment has an economic ife of 4 years with no salvage value. 3. Howard depreciates similar machinery it owns on the straight-line method. 4. The lessee pays all executory costs. 5. Howard's incremental borrowing rate is 10% per year. The lessee is aware that the lessor used an impaat rate of 8% in computing the lease payments (present value factor for 4 periods at 8%, 3.31213; at 10%, 3.16986). Instructions A.) What type of lease should Howard Company record the lease as? How do you know? (2 points) B.) Prepare an amortization schedule for Howard Company covering all 4 payments. (4 points) C.) Prepare all the journal entries on Howard's books that relate to the lease agreement for 2015 and 2016. (10 points) 20 25 30 With no BPO, or title transfer, and onneExplanation / Answer
A capital lease is a lease in which the lessor only finances the leased asset, and all other rights of ownership transfer to the lessee. The criteria for a capital lease can be any one of the following four Conditions-
1- Ownership- The ownership of the asset is shifted from the lessor to the lessee by the end of the lease period; or
2- Bargain purchase option- The lessee can buy the asset from the lessor at the end of the lease term for a below-market price; or
3-Lease term- The period of the lease encompasses at least 75% of the useful life of the asset (and the lease is noncancellable during that time); or
4-Present value- The present value of the minimum lease payments required under the lease is at least 90% of the fair value of the asset at the inception of the lease.
If any of the condition has fulfilled then the lessee records it as a capital lease. Otherwise, the lease is recorded as an operating lease.
In given case lease term of assets is equal to economic life of assets, hence it should be classifies as capital Lease
Amortization Schedule
Lease term 4 year Annual Lease Payment $126,807.00 Sum of PVF @8% 3.31213 PV of MLP Lessee $420,001.27Related Questions
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