On January 1, 2012, Muske Trucking Company leased a semi-tractor and trailer for five years. Annual payments

Question:

On January 1, 2012, Muske Trucking Company leased a semi-tractor and trailer for five years. Annual payments of $28,300 are to be made every December 31 beginning December 31, 2012.

Interest expense is based on a rate of 8%. The present value of the minimum lease payments is $112,994 and has been determined to be greater than 90% of the fair market value of the asset on January 1, 2012. Muske uses straight-line depreciation on all assets.

Required

1. Prepare a table similar to Exhibit 10-7 to show the five-year amortization of the lease obligation.

2. Identify and analyze the effect of the lease transaction on January 1, 2012.

3. Identify and analyze the effect of all transactions on December 31, 2013 (the second year of the lease).

4. Prepare the balance sheet presentation as of December 31, 2013, for the leased asset and the lease obligation.

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...