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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
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 Level Examine 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 Level If 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? |
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