Testbank Problem 118 (Part Level Submission)

Carla Vista Company, as lessee, enters into a lease agreement on July 1, 2021, for equipment. The following data are relevant to the lease agreement:

1.		The term of the noncancelable lease is 4 years, with no renewal option. Payments of $849,815 are due on July 1 of each year.
2.		The fair value of the equipment on July 1, 2021 is $3,080,000. The equipment has an economic life of 6 years with no salvage value.
3.		Carla Vista depreciates similar machinery it owns on the sum-of-the-years'-digits basis.
4.		The lessee pays all executory costs.
5.		Carla Vista's incremental borrowing rate is 10% per year. The lessee is aware that the lessor used an implicit rate of 7% in computing the lease payments.

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(a)

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Indicate the type of lease Carla Vista Company has entered into and what accounting treatment is applicable.

Capital Lease MethodOperating Lease Method

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(b)

Prepare the journal entries on Carla Vista's books that relate to the lease agreement for the following dates: (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 5,250.)

1.		July 1, 2021.
2.		December 31, 2021.
3.		July 1, 2022.
4.		December 31, 2022.

Date	Account Titles and Explanation	Debit	Credit
July 1, 2021December 31, 2021July 1, 2022December 31, 2022
July 1, 2021December 31, 2021July 1, 2022December 31, 2022
	(To record amortization.)
July 1, 2021December 31, 2021July 1, 2022December 31, 2022
	(To record interest payment.)
July 1, 2021December 31, 2021July 1, 2022December 31, 2022
July 1, 2021December 31, 2021July 1, 2022December 31, 2022
	(To record amortization.)
July 1, 2021December 31, 2021July 1, 2022December 31, 2022
	(To record interest payment.)