5. The Horizon Company as lessee enters into a lease agreement on January 1, 2007, for equipment. The following data are relevant to the lease agreement: Required: a. The term of the non-cancelable lease is 4 years, with no renewal option. Payments of $30,000 are due on January 1 of each year, beginning on January 1, 2007. b. The fair value of the equipment on January 1, 2007 is $115,000. The equipment has an economic life of 7 years with no salvage value. c. Horizon depreciates similar equipment it owns on the straight-line basis. d. Horizon is expected to pay all executory costs. e. Horizon's incremental borrowing rate is 9% per year. Horizon, however, is aware that the lessor used an implicit rate of 8% in computing the lease payments. 1. Indicate the type of lease Horizon has entered into and what accounting treatment is applicable. 2. Prepare the journal entries on Horizon's books that relate to the lease agreement for the following dates: a. January 1, 2007 b. December 31, 2007 (Horizon's fiscal year end) c. January 1, 2008 (10 points) Finance 1. Test for a eapital lease: a. Asset transfers to the lessee at end of lease?NO b. Lease contains a bargain Lease term is chase option? NO asset's useful life? 4 compared to 7-57% NO d. PV of min. lease payment are 90% or more of asset's fmv? 1. 30,000 3.577=107,310 (using lower of 8 and 9 percents, or 8 percent) 2. No bargain purchase option 3. No guaranteed residual value 4. No penalties So, Pv of min. lease payments are 107310 which is 93% of the fmv of 115,000, so YES. Thus, this is a capital lease!! 2. a. January 1 Leased Asset 107,310 Cash 30,000 Obligation-Lease 77,310 b. December 31 Interest Expense (77,310.08) 6,185 Obligation - Lease 6,185 Depreciation Expense (107,310/4 years) 26,828 Accum. Depreciation c.January 1, 2008 Cash Obligation - Lease 30,000 30,000 26,828