OPERATING LEASES AND CAPITAL LEASES On January 1, 2009, Moody Company leased a warehouse for $20,000 per year. The first annual payment is due December 31, 2009. The present value of the lease payments, which is also the fair value of the warehouse, is $113,000.

Required:

. Assume that the lease is an operating lease. Prepare the journal entries made by Moody during 2009 and 2010 for the lease.

. Assume that the lease is a capital lease with an effective interest rate of 12 percent per year. Depreciate the cost of the leased warehouse on a straight-line basis over 10 years with zero residual value. Prepare Moody’s 2009 entries to recognize expenses and payments for the capital lease.

Exercise