accounting question Krause company on January 1, 2015, enters into a 10-year non
ID: 2501104 • Letter: A
Question
accounting question Krause company on January 1, 2015, enters into a 10-year noncancelable lease to lease an equipment from Top Leasing Co. The lease contains the following provisions: The agreement requires equal annual rental payments of $289,000 beginning on Jan 1, 2015. The annual rental payment includes $13,010.5 of executory costs related to property taxes. The fair value of the equipment on Jan 1, 2015, is $2,000,000. The equipment has an estimated economic life of 10 years, with an unguaranteed residual value of $100,000. Krause uses the straight-line method to depreciate its assets. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor. Krause's incremental borrowing rate is 8% per year. The lessor's implicit rate is not known. (PV factor for annuity due of 10 annual payments at 8% annual rate = 7.24689) (Round to nearest dollar.) Is this a capital lease or operating lease? Explain why? Prepare the journal entries for Krause on Jan 1, 2015 to record signing of the lease agreement and first rental payment. Prepare the journal entries for Krause on Dec 31, 2015 to record depreciation expense and interest expense.Explanation / Answer
1. The Lease is Finance lease/Capital lease since significant life of the asset is covered in th elease tenure.
2. The Lease must be recorded at the fair Value of the Lease as on the Date of Agreemnet
1. Leased Asset Account debit 2000000
To Top Leasing Company 2000000
( On recognising The asset into Books)
2.Top Leasing Company Debit 289000
To Bank 289000
( Being First Installment Made)
3. Depreciation Account Debit 200000
Interst on lease Debit 200000
To Leased Asset Account 200000
To acrude Interest 200000
( Being Recording of Depreciation & Ineterst Accrude on Lease payable)
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