On January 1, 2019, Carey Inc. entered into a noncancelable lease agreement, agreeing to pay $14,000 at the end of each year for four years to acquire a new computer system having a market value of $40,800. The expected useful life of the computer system is also four years, and the computer will be depreciated on a straight-line basis with no salvage value. The interest rate used by the lessor to determine the annual payments was 14%. Under the terms of the lease, Carey has an option to purchase the computer for $1 on January 1, 2023.

Required:

a. Explain why Carey should account for this lease as a financing lease rather than an operating lease. (Hint: Determine which of the five criteria for capitalizing a lease have most likely been met.)

b. Show in a horizontal model or write the entry that Carey should make on January 1, 2019. Round your answer to the nearest $10. First determine the present value of future lease payments using Table 6-5.

c. Show in a horizontal model or write the entry that Carey, Inc., should make on December 31, 2019, to record the first annual lease payment of $14,000. Do not round your answers. (Hint: Based on your answer to part b, determine the appropriate amounts for interest and principal.)

d. What expenses (include amounts) should be recognized for this lease on the income statement for the year ended December 31, 2019?

e. Explain why the accounting for an asset acquired under a financing lease isn?t really any different than the accounting for an asset that was purchased with money borrowed on a long-term loan.

Table 6-5

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Discount Rate No. of 20% Perlods 2% 4% 6% 8% 10% 12% 14% 16% 18% 0.9259 0.8475 0.8333 0.980 0.9615 0.9434 0.9091 0.8929 0.8772 0.8621 1.6901 1.5278 2 1.942 1.8861 1.8334 1.7833 1.7355 1.6467 1.6052 1.5656 2.884 2.7751 2.6730 2.5771 2.4869 2.4018 2.3216 2.2459 2.1743 2.1065 3.1699 4 3.808 3.6299 3.4651 3.3121 3.0373 2.9137 2.7982 2.6901 2.5887 4.713 3.9927 4.4518 4.2124 3.7908 3.6048 3.4331 3.2743 3.1272 2.9906 5.601 5.2421 4.9173 4.6229 4.3553 4.1114 3.8887 3.6847 3.4976 3.3255 3.6046 6.472 6.0021 5.5824 5.2064 4.8684 4.5638 4.2883 4.0386 3.8115 5.3349 7.325 6.7327 6.2098 5.7466 4.9676 4.6389 4.3436 4.0776 3.8372 7.4353 5.7590 8.162 6.8017 6.2469 5.3282 4.9464 4.6065 4.3030 4.0310 8.1109 7.3601 10 8.983 6.7101 6.1446 5.6502 5.2161 4.8332 4.4941 4.1925 11 9.787 8.7605 7.8869 7.1390 6.4951 5.9377 5.4527 5.0286 4.6560 4.3271 6.8137 12 10.575 9.3851 8.3838 7.5361 6.1944 5.6603 5.1971 4.7932 4.4392 7.1034 13 11.348 9.9856 8.8527 7.9038 6.4235 5.8424 5.3423 4.9095 4.5327 7.3667 5.0081 14 12.106 10.5631 9.2950 8.2442 6.6282 6.0021 5.4675 4.6106 12.849 11.1184 4.6755 15 9.7 122 8.5595 7.6061 6.8109 6.1422 5.5755 5.0916 16 13.578 11.6523 10.1059 8.8514 7.8237 6.9740 6.2651 5.6685 5.1624 4.7296 8.0216 17 14.292 12.1657 10.4773 9.1216 7.1196 6.3729 5.7487 5.2223 4.7746 8.2014 4.8122 18 14.992 12.6593 10.8276 9.3719 7.2497 6.4674 5.8178 5.2732 19 15.678 13.1339 11.1581 9.6036 8.3649 7.3658 6.5504 5.8775 5.3162 4.8435 8.5136 5.9288 4.8696 20 16.351 13.5903 11.4699 9.8181 7.4694 6.6231 5.3527 21 17.011 14.0292 11.7641 10.0168 8.6487 7.5620 6.6870 5.9731 5.3837 4.8913 10.2007 8.77 15 7.6446 22 17.658 14.4511 12.0416 6.7429 6.0113 5.4099 4.9094 8.8832 7.7184 4.9245 23 18.292 14.8568 12.3034 10.3711 6.7921 6.0442 5.4321 8.9847 24 18.914 15.2470 12.5504 10.5288 7.7843 6.8351 6.0726 5.4509 4.9371 7.8431 25 19.523 15.6221 12.7834 10.6748 9.0770 6.8729 6.0971 5.4669 4.9476 30 22.396 17.2920 13.7648 11.2578 9.4269 8.0552 7.0027 6.1772 5.5168 4.9789 9.6442 35 24.999 18.6646 14.4982 11.6546 8.1755 7.0700 6.2153 5.5386 4.9915 5.5482 40 27.355 19.7928 15.0463 11.9246 9.7791 8.2438 7.1050 6.2335 4.9966 9.8628 4.9986 45 29.490 20.7200 15.4558 12.1084 8.2825 7.1232 6.2421 5.5523 9.9148 50 31.424 21.4822 15.7619 12.2335 8.3045 7.1327 6.2463 5.5541 4.9995 00