Asked by Desirea Moore on May 07, 2024
Verified
Conroy Company leased equipment on January 1,2015.Information pertinent to the lease is as follows:
• The lease term is 6 years.
• Annual payments of $60,000 are due on January 1 of each year;the first payment was made at the inception of the lease.
• Conroy's incremental borrowing rate is 12%.
• The implicit interest rate is 10%;Conroy knew the implicit interest rate.
• The unguaranteed residual value is $50,000.
• The useful life of the equipment is 10 years.
• Conroy uses the straight-line depreciation method.
• The fair value of the equipment is $325,000.
• The lease agreement did not contain either a bargain purchase option or a transfer of title.
Required:
Prepare all the necessary journal entries for the year ended December 31,2015 with respect to Conroy Company's lease.
Incremental Borrowing Rate
The interest rate a lessee would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments.
Implicit Interest Rate
The rate of interest implied in the lease payments or in other financial arrangements, not explicitly stated.
Residual Value
The estimated value of an asset at the end of its lease term or useful life.
- Ascertain and identify the differences between interest expense, depreciation expense, and profit earned by manufacturers or dealers from leasing activities.
- Scrutinize the impact that lease accounting has on financial statement presentation and recognize the disclosure mandates.
Verified Answer
KD
Kingsley DamasahMay 14, 2024
Final Answer :
January 1, 2015 Lease Expense \quad 60,000
Cash \quad\quad\quad 60,000 The lease does not meet the criteria of a capital lease given that there isn't a bargain purchase option or a transfer of title;in addition,the lease term is less than 75% of the leased asset's useful life (6/10 = 60%),and the present value of the payments is less than 90% of the leased asset's fair value ($287,447/$325,000 = 88%).
Cash \quad\quad\quad 60,000 The lease does not meet the criteria of a capital lease given that there isn't a bargain purchase option or a transfer of title;in addition,the lease term is less than 75% of the leased asset's useful life (6/10 = 60%),and the present value of the payments is less than 90% of the leased asset's fair value ($287,447/$325,000 = 88%).
Learning Objectives
- Ascertain and identify the differences between interest expense, depreciation expense, and profit earned by manufacturers or dealers from leasing activities.
- Scrutinize the impact that lease accounting has on financial statement presentation and recognize the disclosure mandates.