On January 1, 2011, Q-Mart entered into a five-year lease agreement requiring annual payments of $10,000 on

Question:

On January 1, 2011, Q-Mart entered into a five-year lease agreement requiring annual payments of $10,000 on December 31 of each year. The fair market value of the facility was estimated by appraisers to be $39,927,

(a) Record the journal entries required over the five-year period, assuming that Q-Mart accounts for this arrangements as a capital lease. Assume that the capitalized asset is depreciated over a five-year period, using the straight line method with no salvage value.

(b) Compute the effective interest rate on the lease, and record the journal entries required over the five-year period if Q-Mart accounts for this arrangement as a capital lease. Assume that the capitalized asset is depreciated over a five-year period, using the straight-line method with no salvage value.

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...