Isden Production Company leased a machine on January 1, 1990, under a contract calling for annual payments of \(\$ 48,000\) on December 31 at the end of each of five years, with the machine becoming the property of the lessee company after the fifth \(\$ 48,000\) payment. The machine was estimated to have an eight-year-life and no salvage value, and the interest rate available to Isden for equipment loans on the day the lease was signed was \(14 \%\). The machine was delivered on January 5, 1990, and was immediately placed in operation. At the beginning of the eighth year in the machine's life, it was overhauled at a \(\$ 3,060\) total cost. The overhaul was paid for on January 10, and it did not increase the machine's efficiency but it did add an additional year to its expected service life. On March 31, during the ninth year in the machine's life, it was traded in on a new machine of like purpose having a \(\$ 144,000\) cash price. A \(\$ 12,000\) trade-in allowance was received and the balance was paid in cash.

\section*{Required}

(Round all amounts in your answers to the nearest whole dollar.)

1. Prepare a schedule with the column headings of Illustration 10-3. Enter the years 1990 through 1994 in the first column and complete the schedule by filling in the proper amounts.

2. Prepare the entry to record the leasing of the machine.

3. Prepare December 31, 1991, entries to record annual depreciation on a straight-line basis, to record the lease payment, and to amortize the discount in the life of the lease. Also show how the machine and the lease liability should appear on the December 31, 1991, balance sheet.

4. Prepare the entries to record the machine's overhaul and the depreciation on the machine at the end of its eighth year.

5. Prepare the March 31, 1998, entries to record the exchange of the machines.

Problem 10-6 Accounting for capital and operating leases

(L.O. 6)