The following facts pertain to a non-cancellable lease agreement between Woodhouse Leasing Corporation and McKee Electronics Ltd., a lessee, for a computer system:

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties about costs that have not yet been incurred by the lessor. McKee Electronics Ltd., the lessee, assumes responsibility for all repairs and maintenance costs, which amount to $2,500 per year and are to be paid each October 1, beginning October 1, 2017, by the lessee directly to the suppliers. 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 for the lease obligation has been prepared correctly for use by both the lessor and the lessee in accounting for this lease using ASPE. The lease is accounted for properly as a capital lease by the lessee and as a direct financing lease by the lessor.

Instructions
Answer the following questions, rounding all numbers to the nearest dollar.
(a) Assuming that McKee Electronics' 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, 2018?
2. What items and amounts will appear on the lessee's balance sheet at September 30, 2018?
3. What items and amounts will appear on the lessee's income statement for the year ending September 30, 2019?
4. What items and amounts will appear on the lessee's balance sheet at September 30, 2019?
(b) Assuming that McKee Electronics' accounting period ends on December 31, answer the same questions as in part (a) above for the years ending December 31, 2017 and 2018.

Transcribed Image Text:

Inception date Lease term Economic life of leased equipment Fair value of asset at October 1, 2017 Residual value at end of lease term Lessor's implicit rate Lessee's incremental borrowing rate Annual lease payment due at the beginning of each year, beginning October 1, 2017 October 1, 2017 6 years 6 years $150,690 8.5% 8.5% $30,500 891 619801 29752 097 8 5 20891 2358 621290 192981 24653-3 086422 0000003 3333338 7789012