I do not understand when to use "which" method to do the leasing entries? How can I know how to do them ? What are common questions/ tasks for leasing for an accounting final in university?
27. Preparing lessor's journal entries for an operating lease and a capital lease. Sun Microsys- tems manufactures an engineering workstation for $7,200 and sells it for $12,000. Although the workstation has a physical life of approximately 10 years, rapid technological change limits its expected useful life to three years. Sun leases a workstation to Design Consul- tants for the three-year period beginning January 1, 2013. The annual rental payments of $4,386.70 are due at the beginning of each year. The interest rate appropriate for discount- ing cash flows is 10%, compounded annually. Sun uses a calendar year as its reporting period. a. Does this lease qualify as an operating lease or a capital lease under the current/old rules? Explain. b. Assume that this lease qualifies as an operating lease. Give the journal entries for Sun Microsystems over the three-year period. c. Repeat part b assuming that the lease qualifies as a capital lease. 761.33 December 31, 2013 Lease Receivable = 0.10 x $7,613.30) Interest Revenue ......... To record interest revenue for 2013. 761.33 4,386.70 4,386.70 January 1, 2014 Cash........... Lease Receivable......... To record cash received at the beginning of 2014. The carrying value of the receivable is now $3,987.93 (= $7,613.30 + $761.33 - $4,386.70). 398.77 398.77 December 31, 2014 Lease Receivable (= 0.10 x $3,987.93) Interest Revenue .... To record interest revenue for 2014. Interest revenue is slightly less than 0.10 x $3,987.93 due to rounding of present value factors. The carrying value of the receivable is now $4,386.70 (= $3,987.93 + $398.77). 4,386.70 January 1, 2015 Cash.......... Lease Receivable......... To record cash received for 2015. 4,386.70 Question 4 Leasing (10 points) The Montana Corporation signed a 5-year capital leasing contract with Tuky Corporation and agrees to make annual payments of 10,000 at the end of each year. Montana Corporation capitalizes the leasing at its borrowing rate (at the inception of the lease) of 8%. The useful life of this leasing asset is 5 years and has no residual value. Montana uses straight-line depreciation method to allocate the cost Required: Please prepare journal entries related with this transaction for the first two years (keep 2 digit after decimal for the calculation). Beginning of the contract Dr. Leasing asset 39927.1 (1p) Cr. Leasing liability 39927.1 (1p) At the end of the first year Dr. Leasing liability 6805.83 (1p) Interest expense 3194.17 (1p) Cr. Cash 10,000 (1p) Dr. Depreciation expense 7985.42 (1p) Cr. Accumulated depreciation 7985.42 (1p) At the beginning of the second year Dr. Leasing liability 7350.30 (1p) Interest expense 2649.70 (1p) Cr. Cash 10,000 (1p) Dr. Depreciation expense 7985.42 Cr. Accumulated depreciation 7985.42
