Question
Lindy Corporation started operations in 2015 and leases its retail space. The lease is for 20 years with annual payments of $98,491 starting on January
Lindy Corporation started operations in 2015 and leases its retail space. The lease is for 20 years with annual payments of $98,491 starting on January 1, 2015. Using a 9% discount rate, the PV of the lease payments on January 1, 2015 was $980,000 - equal to the FV of the property at that time. Lindy accounted for the lease as an operating lease from inception. Lindy uses S-L depreciation for all its assets and its income tax rate is 40%. Had Lindy accounted for the lease as a capital lease it should have made the following entries in 2015: 1/1 Leased asset 980,000 Lease liability 980,000 Lease liability 98,491 Cash 98,491 12/31 Depreciation expense 49,000 Accum. Depr., LA 49,000 Interest expense 79,336 Lease liability 79,336 However, Lindys auditor believes that real estate leases such as these should be accounted for as capital leases, and discovered the error after the books were closed in 2016. Prepare the appropriate 2016 journal entries to correct for this error assuming the January 1, 2016 entry for the cash payment had already been made.
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