On 31 December 20X1, Lessee Limited entered into a lease agreement by which Lessee leased a jutling

Question:

On 31 December 20X1, Lessee Limited entered into a lease agreement by which Lessee leased a jutling machine for six years. Annual lease payments are \(\$ 20,000\), payable at the beginning of each lease year (31 December). At the end of the lease, possession of the machine will revert to the lessor. The normal economic life for this type of machine is 8 to 10 years.

At the time of the lease agreement, jutling machines could be purchased for approximately \(\$ 90,000\) cash. Equivalent financing for the machine could have been obtained from Lessee's bank at \(14 \%\).

Lessee's fiscal year coincides with the calendar year. Lessee uses straight-line depreciation for its jutling machines.

Required:

1. Prepare an amortization table for the lease, assuming that the lease will be capitalized by Lessee.

2. In general journal form, prepare all journal entries relating to the lease and the leased asset for \(20 \times 1,20 X 2\), and \(20 X 3\). Ignore income tax effects.

3. Repeat requirement (2) assuming that the fair market value of the equipment was \(\$ 77,273\) at the inception of the lease.

4. Return to the original facts of the situation. How would the amounts relating to the leased asset and lease liability be shown on Lessee's statement of financial position at 31 December 20X4?

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