Question
Michael Enterprises leased a machine on June 1, 2012, under a 10-year lease. The eco- nomic life of the machine is estimated to be 12
Michael Enterprises leased a machine on June 1, 2012, under a 10-year lease. The eco- nomic life of the machine is estimated to be 12 years. Title to the machine passes to Michael Enterprises at the expiration of the lease, and thus, the lease is a capital lease. The lease payments are $100,000 per year, including executory costs of $4,000 per year, all payable in advance annually. The incremental borrowing rate of the company is 10%, and the lessors implicit interest rate is unknown. Michael Enterprises uses the straight-line method of amortization and the calendar year for reporting purposes.
Instructions:
A. Give all entries on the books of the lessee relating to the lease for 2012.
B. Assume that the lessor retains title to the machine at the expiration of the lease, that there is no bargain renewal or purchase option, and that the fair value of the equipment is $740,000 as of the lease date. Using the criteria for distinguishing between operating and capital leases according to FASB Statement No. 13, what would be the amortization expense for 2012?
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