37. (5 points) On 01-01-14, C leased a machine with a useful life of 10 years. T

Question

37. (5 points) On 01-01-14, C leased a machine with a useful life of 10 years. The noncancelable lease agreement required C to make 6 annual lease payments of $250,000 starting 01-01-14. After making the last payment, C will retain the machine. C’s borrowing rate on 01-01-15 was 3.25%. C uses a straight-line depreciation method and assumes no salvage value. C only prepares AJEs every 12-31. Using current GAAP rules, i.e., determine if this is an operating or a capital lease, prepare the lease-related entries C should make on:a.01-01-14b.12-31-14c.01-01-15d.12-31-15

Explanation / Answer

Its a capital lease as asset if retained by C after making the last payment.

Journal entries

01-01-14

initial recording of capital lease at present value based on effective interest method

Leased Equipement $ 1413684

to Capital lease oblication $ 1413684

31-12-14

Depreciation expense $ 141368

to Accumulated depreciation $ 141368

01-01-15

Interest expense $ 37495

to acrued interest on capital lease $ 37495

Acrued interest on capital lease $ 37495

capital lease $ 222505

to cash $ 260000

31-12-15

Depreciation expense $ 141368

to Accumulated depreciation $ 141368

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