38. (5 points) On January 1, 2014, C leased a machine with a useful life of 8 ye

Question

38. (5 points) On January 1, 2014, C leased a machine with a useful life of 8 years. The noncancelable lease agreement required C to make 3 annual lease payments of $100,000 starting December 31, 2014. At the end of the lease agreement, C will return the machine to the lessor. C’s borrowing rate on January 1, 2014 was 5%. C uses the straight-line depreciation method (no residual value) and only prepares AJEs every December 31. Using future GAAP rules, i.e., determine if this is a short-term or long-term lease and IF long-term, if this is a long-term finance lease OR a long-term operating lease, prepare the lease-related entries C should make on:

a) January 1, 2014

b) December 31, 2014

c) December 31, 2015

d) December 31, 2016

Explanation / Answer

It is a short term lease as the tenure is just for 3 years which is less than 50% of the machine life/.

It is a operating lease as the machine is to returned at the end of the lease term and also the tenure of machine is just 3 yrs which is less than even 50% of the economic life of an asset.

ENTRIES. DEBIT CREDIT

A-machine on lease 300000

lessor 300000

B-lessor 100000

bank 100000

C-lessor 100000

bank 100000

D-lessor 100000

bank 100000

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

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