On January 1, 2011, ABC Manufacturing Corporation leased a machine to Start Corporation. The machine had cost ABC $480,000 to manufacture, and would normally have sold for about $600,000. The 10-year lease was classified as a finance lease for accounting purposes.
The machine is expected to have a total useful life of 12 years. However, it will be returned to ABC at the end of the 10-year lease. The lease agreement requires equal semi-annual payments of $44,936 to be made each June 30 and December 31, which reflects an annual interest rate of 10%. Start Corporation closes its books annually on December 31.
Required:
a. Calculate the present value of the payments that will be made under this lease agreement.
b. Provide the journal entry that should be made by Start Corporation on January 1, 2011, to record the inception of the lease.
c. Over what period of time—10 years or 12 years—should Start Corporation depreciate this machine? Explain briefly.
d. Assuming that Start Corporation uses straight-line depreciation, provide the journal entry that should be made each December 31 to record the depreciation of this asset.
e. Provide the journal entries that should be made by Start Corporation to record the lease payments on:
i. June 30, 2011
ii. December 31, 2011
iii. June 30, 2012
iv. December 31, 2012
f. What values will be reported on Start Corporation's December 31, 2012, statement of financial position for the leased machine and the lease obligation?
g. What values related to the lease will be reported on Start Corporation's statement of earnings for the year ended December 31, 2012?