Question #1:Fully explain how a capital lease is accounted for by a lessee from at inception and during the first year of the lease assuming ownership of the property is transferred to the lessee by the end of the lease. You are not required to explain the criteria for distinguishing between capital and operating leases.

Question #2: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.)

Required:

1. Prepare IBMs accounting entries for 2015.
2. 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.
3. Construct a table showing payments of interest and principal made every year for the five-year lease term.
4. 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.
5. In one paragraph, discuss the income and cash flow implications from this capital lease.