Demir Leasing Company signs an agreement on January 1, 2015, to lease equipment to Azure Company. The

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Demir Leasing Company signs an agreement on January 1, 2015, to lease equipment to Azure Company. The following information relates to this agreement.

1. The term of the non-cancelable lease is 5 years with no renewal option. The equipment has an estimated economic life of 5 years.

2. The fair value of the asset at January 1, 2015, is 90,000.

3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of 7,000, none of which is guaranteed.

4. Azure Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) 900 to Frontier Insurance Company for insurance and (2) 1,600 for property taxes.

5. The agreement requires equal annual rental payments of 20,541.11 to the lessor, beginning on January 1, 2015.

6. The lessee’s incremental borrowing rate is 12%. The lessor’s implicit rate is 10% and is known to the lessee.

7. Azure Company uses the straight-line depreciation method for all equipment.
8. Azure uses reversing entries when appropriate.
Instructions (Round all numbers to two decimal places.)

(a) Prepare an amortization schedule that would be suitable for the lessee for the lease term.

(b) Prepare all of the journal entries for the lessee for 2015 and 2016 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31.

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Intermediate Accounting IFRS Edition

ISBN: 9781118443965

2nd Edition

Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield

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