Ludwick Steel Company as lessee signed a lease agreement for equipment for 5 years, beginning December 31,

Question:

Ludwick Steel Company as lessee signed a lease agreement for equipment for 5 years, beginning December 31, 2010. Annual rental payments of $40,000 are to be made at the beginning of each lease year (December 31). The taxes, insurance, and the maintenance costs are the obligation of the lessee. The interest rate used by the lessor in setting the payment schedule is 9%; Ludwick’s incremental borrowing rate is 10%. Ludwick is unaware of the rate being used by the lessor. At the end of the lease, Ludwick has the option to buy the equipment for $1, considerably below its estimated fair value at that time. The equipment has an estimated useful life of 7 years, with no salvage value. Ludwick uses the straight-line method of depreciation on similar owned equipment. (Round all numbers to the nearest dollar.)

(a) Prepare the journal entry or entries, with explanations, that should be recorded on December 31, 2010, by Ludwick.

(b) Prepare the journal entry or entries, with explanations, that should be recorded on December 31, 2011, by Ludwick. (Prepare the lease amortization schedule for all five payments.)

(d) What amounts would appear on Ludwick’s December 31, 2012, balance sheet relative to the lease arrangement?

Depreciation
Depreciation is an important concept in accounting. By definition, depreciation is the wear and tear in the value of a noncurrent asset over its useful life. In simple words, depreciation is the cost of operating a noncurrent asset producing... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... 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...