The following facts pertain to a noncancelable lease agreement between Alschuler Leasing Company and McKee Electronics, a lessee, for a computer system.

Inception date:

October 1, 2012

Lease term:

6 years

Economic life of lease equipment:

6 years

Fair value of asset at October 1, 2012:

$300,383

Residual value at end of lease term:

0

Lessor's implicit rate:

10%

Lessee's incremental borrowing rate:

10%

Annual lease payment due at the beginning of each year, beginning with October 1, 2012:

$62,700

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes

responsibility for all executory costs, which amount to

$5,500

per year, and are paid each

October 1, beginning October 1, 2012. (This $5,500 is not included in the rental payment of $62,700.) The asset will revert to the lessor at the end of the lease term. The straight-line depreciation method is used for all equipment.

The following amortization schedule has been prepared correctly for use by both the lessor and the lessee in accounting for this lease. The lease is to be accounted for properly as a capital lease by the lessee and as a direct-finance lease by the lessor.

Date:

Annual lease Payment / Receipt:

Interest (10%) on Unpaid Liabililty / Receivable:

Reduction of Lease Liability / Receivable:

Balance of Lease Liability / Receivable:

10/01/12

300,383.00

10/01/12

62,700.00

62,700.00

237,683.00

10/01/13

62,700.00

23,768.30

38,931.70

198,751.30

10/01/14

62,700.00

19,875.13

42,824.87

155,926.43

10/01/15

62,700.00

15,592.64

47,107.36

108,819.07

10/01/16

62,700.00

10,881.91

51,818.09

57,000.98

10/01/17

62,700.00

5,699.02

57,000.98

0.00

376,200.00

75,817.00

300,383.00

Instructions:

(a) Assuming the lessee's accounting period ends on September 30, answer the following questions with respect to this lease agreement:

(1) What items and amounts will appear on the lessee's income statement for the year ending September 30, 2013?

Interest expense (See amortization schedule)

$23,768.30

Lease executory expense

$5,500.00

Depreciation expense

Amount

(2) What items and amounts will appear on the lessee's balance sheet at September 30, 2013?

Current liabilities:

Lease liability

$38,931.70

Account Title

Amount

Long-term liabilities:

Account Title

Amount

Property, plant, and equipment:

Account Title

$300,383.00

Account Title

Amount

(3) What items and amounts will appear on the lessee's income statement for the year ending September 30, 2014?

Interest expense (See amortization schedule)

Amount

Account Title

Amount

Account Title

Amount

(4) What items and amounts will appear on the lessee's balance sheet at September 30, 2014?

Current liabilities:

Account Title

Amount

Account Title

Amount

Long-term liabilities:

Account Title

$155,926.43

Property, plant, and equipment:

Leased computer under capital lease

Amount

Account Title

Amount

(b) Assuming the lessee's accounting period ends on December 31, answer the following questions with respect to this lease agreement:

(1) What items and amounts will appear on the lessee's income statement for the year ending December 31, 2012?

Interest expense

$5,942.08

Account Title

Amount

Account Title

Amount

(2) What items and amounts will appear on the lessee's balance sheet at December 31, 2012?

Current liabilities:

Account Title

Amount

Account Title

Amount

Long-term liabilities:

Account Title

Amount

Property, plant, and equipment:

Leased computer under capital lease

$300,383.00

Account Title

Amount

Current assets:

Account Title

Amount

(3) What items and amounts will appear on the lessee's income statement for the year ending December 31, 2013?

Interest expense

Amount

Account Title

Amount

Account Title

Amount

(4) What items and amounts will appear on the lessee's balance sheet at December 31, 2013?

Current liabilities:

Lease liability

$42,824.87

Account Title

Amount

Long-term liabilities:

Lease liability

Amount

Property, plant, and equipment:

Leased computer under capital lease

$300,383.00

Account Title

Amount

Current assets:

Account Title

Amount