Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

On January 1, 2015 IBM leases an equipment from Omaha Inc. for an annual lease rental of $20,000. The lease term is five years and

On January 1, 2015 IBM leases an equipment from Omaha Inc. for an annual lease rental of $20,000. The lease term is five years and the lessor's interest rate implicit in the lease is 8%. The lessee's incremental borrowing rate is 8.25%. The useful life of the equipment is five years and its estimated residual value equals its removal cost. Annuity tables indicate that the present value of an annual lease rental of $1 (at 8% rate) is $3.993. The fair value of leased equipment equals the present value of rentals. (Assume the lease is capitalized.)

Answer this:

A. Prepare IBMs accounting entries for 2015.

B. Compute and illustrate the effect on the income statement for the year ended December 31, 2015, and for the balance sheet as of December 31, 2015.

C. Construct a table showing payments of interest and principal made every year for the five-year lease term.

D. Construct a table showing expenses charged to the income statement for the five-year lease term if the equipment is purchased. Show a column for (1) amortization, (2) interest, and (3) total expenses.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Frank Woods Business Accounting Volume 1

Authors: Alan Sangster Lewis Gordon Frank Wood

14th Edition

1292208627, 9781292208626

More Books

Students also viewed these Accounting questions