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Koffman and Sons signed a four-year lease for a forklift on January 1, 2017. Annual lease payments

Question:

Koffman and Sons signed a four-year lease for a forklift on January 1, 2017. Annual lease payments of $1,510, based on an interest rate of 8%, are to be made every December 31, beginning with December 31, 2017.

Required

1. Assume that the lease is treated as an operating lease.

a. Will the value of the forklift appear on Koffman's balance sheet?

b. What account will indicate that lease payments have been made?

2. Assume that the lease is treated as a capital lease or finance lease.

a. Identify and analyze the effect when the lease is signed. Explain why the value of the leased asset is not recorded at $6,040.

b. Identify and analyze the effect of the first lease payment on December 31, 2017.

c. Calculate the amount of depreciation expense for the year 2017.

d. At what amount would the lease obligation be presented on the balance sheet as of December 31, 2017?

Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
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1 a The value of the forklift will not appear on the balance sheet b The lease payments will ...View the full answer


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Depreciation of non-current assets is the process of allocating the cost of the asset over its useful life. The cost of the asset includes the purchase price, any additional costs incurred to bring the asset to its current condition and location, and any other costs that are directly attributable to the asset. The useful life of the asset is the period over which the asset is expected to be used by the company. To calculate the depreciation, companies use different methods such as straight-line, declining-balance, sum-of-the-years\'-digits, units-of-production, and group depreciation. The chosen method will depend on the type of asset, the company\'s accounting policies, and the accounting standards that are applicable. The straight-line method allocates an equal amount of the asset\'s cost over its useful life, while the declining-balance method calculates depreciation at a fixed rate, typically double the straight-line rate, but the amount of depreciation decreases over time. The sum-of-the-years\'-digits method is similar to the declining-balance method, but the rate of depreciation is calculated using a fraction that is based on the useful life of the asset. It\'s important to note that the depreciation expense will be recorded on the company\'s income statement and the accumulated depreciation will be recorded on the company\'s balance sheet. This will decrease the value of the asset on the balance sheet over time.

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