2. Timothy Company signs a lease agreement dated January 1, 2016 with Jasper Company for equipment. The lease terms, provisions, and related events are as follows:

1) Timothy agrees to pay all executory costs.

2) The lease does not contain any renewal or bargain purchase options.

3) The lease term is 6 years. The lease is noncancelable and requires equal rental payments to be made at the end of each year.

4) The equipment has an estimated useful life of 7 years, fair value of $225,000, and does not have a residual value.

5) The annual payment is set by Jasper at $51,661.67 to earn a rate of return of 10%. Timothy is aware of the rate and it is equal to its borrowing rate.

6) Timothy uses the straight line method of depreciation on all of its equipment.

Required:

1) Using the four criteria required for capitalization determine whether the lease is an operating lease or a capital leasefor the lessee.

2) Calculate the amount of the asset and liability of Timothy at the inception of the lease.

3) Prepare the amortization table for the lease and interest expense.

4) Prepare the journal entries for Timothy for 2016.

3.On January 1, Year 1, the Dole Company purchased an asset that cost $154,000. The asset had an expected useful life of seven years and no estimated residual value. The company initially decided to use sum-of-the-years'-digits (SYD) depreciation for both financial accounting and income tax purposes. Depreciation expense for the straight-line method and the sum-of-the-years'-digits method is as follows:

Straight-line

SYD over

Year

over 7 Years

7 Years

Difference

1

$ 22,000

$ 38,500

$ 16,500

2

22,000

33,000

11,000

3

22,000

27,500

5,500

4

22,000

22,000

0

5

22,000

16,500

(5,500)

6

22,000

11,000

(11,000)

7

22,000

5,500

(16,500)

$154,000

$154,000

$0

At the beginning of Year 4, Dole changed from the sum-of-the-years'-digits method to the straight-line method of depreciation for financial reporting purposes. The company's income tax rate is 30%. In Year 3 and Year 4, Dole had $90,000 pretax income before depreciation and income taxes.

Required:

a.

Complete the following section of the income statement:

Year 3

Year 4

Pretax income before depreciation

$90,000

$90,000

Depreciation expense

_______

_______

Income before income taxes

_______

_______

Income tax expense

_______

_______

Net income

_______

_______

b.

Prepare the journal entries to record the depreciation expense, tax expense, and the effect of the accounting change (if any) in Year 4.