Sax Company signs a lease agreement dated January 1, 2016, that provides for it to lease computers from Appleton Company beginning January 1, 2016. The lease terms, provisions, and related events are as follows:

1. The lease term is 5 years. The lease is noncancelable and requires equal rental payments to be made at the end of each year.2. The computers have an estimated life of 5 years, a fair value of $300,000, and a zero estimated residual value.3. Sax agrees to pay all executory costs.4. The lease contains no renewal or bargain purchase option.5. The annual payment is set by Appleton at $83,222.92 to earn a rate of return of 12% on its net investment. Sax is aware of this rate, which is equal to its borrowing rate.6. Sax uses the straight-line method to record depreciation on similar equipment.

Required:

1. Next LevelExamine and evaluate each capitalization criteria and determine what type of lease this is for Sax.

2. Calculate the amount of the asset and liability of Sax at the inception of the lease.

3. Prepare a table summarizing the lease payments and interest expense.

4. Prepare journal entries for Sax for the years 2016 and 2017.5.

Next LevelIf the lease term is 3 years and the annual payment is $110,000, how would Sax classify the lease under (a) U.S. GAAP and (b) IFRS?

CHART OF ACCOUNTS

Sax Company

General Ledger

ASSETS

111 Cash

121 Accounts Receivable

141 Inventory

152 Prepaid Insurance

181 Leased Equipment

189 Accumulated Depreciation

LIABILITIES

211 Accounts Payable

231 Salaries Payable

252 Capital Lease Obligation

255 Accrued Interest on Capital Lease Obligation

261 Income Taxes Payable

EQUITY

311 Common Stock

331 Retained Earnings

REVENUE

411 Sales Revenue

EXPENSES

500 Cost of Goods Sold

511 Insurance Expense

512 Utilities Expense

521 Salaries Expense

532 Bad Debt Expense

540 Interest Expense

541 Depreciation Expense

559 Miscellaneous Expenses

910 Income Tax Expense

Calculate the amount of the asset and liability of Sax at the inception of the lease. Additional Instruction

$

Prepare a table summarizing the lease payments and interest expense. Additional Instructions

If an amount is zero, enter "0".

Round your answers to the nearest cent and use the rounded answers in subsequent computations.

Sax Company

Summary of Lease Payments and Interest Expense

2016 - 2020

1 Date Lease Payment Required Interest Expense at 12% on Obligation Balance Reduction of Lease Obligation Balance of Obligation

2 January 1, 2016

3 December 31, 2016

4December 31, 2017

5December 31, 2018

6December 31, 2019

7December 31, 2020

GENERAL JOURNAL

DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT

1

2

3

4

5

6