OPERATING LEASES AND CAPITAL LEASES. On January 1, 19x6, Moody Company leased a warehouse for $20,000 per year. The first annual payment is due December 31, 19x6. The present value of the lease payments, which is also the fair value of the warehouse, is $113,000.

REQUIRED:

1. Assume that the lease is an operating lease. Prepare the journal entries made by Moody during 19x6 and 19x7 for the lease. -

2. Assume that the lease is a capital lease with an effective interest rate of 12% per year. Depreciate the cost of the leased warehouse on a straight-line basis over 10 years with zero residual value. Prepare Moody’s 19x6 entries to recognize expenses and payments for the capital lease.

APPENDIX EXERCISES