On January 1, 2016, Concord Corp. signs a contract to lease manufacturing equipment from Stone Inc. Concord agree to make lease payments of $47,500 per year. Additional information pertaining to the lease is as follows:
1. The term of the noncancelable lease is 3 years, with a renewal option at the end of the lease term. Payments an due every January 1, beginning January 1, 2016.
2. The fair value of the manufacturing equipment on January 1, 2016, is $150,000. The equipment has an economic life of 7 years.
3. Concord guarantees that the equipment will have a residual value of $15,000 at the end of the lease term.
4. Concord Corp. depreciates similar assets using the double-declining-balance method.
5. Concord's incremental borrowing rate is 15% per year; Stone's implicit interest rate is 10.5% and known by Concord.
6. Concord pays $2,500 per year for maintenance of the equipment and $1,000 in property taxes.
Required:
1. Examine and evaluate each capitalization criteria and determine what type of lease this is for Concord.
2. Calculate the amount of the asset and liability to be reported by Concord at the inception of the lease (round to the nearest dollar).
3. Prepare a table summarizing the lease payments and interest expense.
4. Prepare journal entries for Concord for the entire lease period. Assume that the equipment has a fair value of $9,500 at the end of the 3-year lease tam.