Response to the following problem:
Preston Company signs a five-year capital lease with Starbuck Company for office equipment. The annual lease payment is $10,000, and the interest rate is 10%.
Required:
1. Compute the present value of Preston's lease payments.
2. Prepare the journal entry to record Preston's capital lease at its inception.
3. Complete a lease payment schedule for the five years of the lease with the following headings. Assume that the beginning balance of the lease liability (present value of lease payments) is $37,908.
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Period Ending Date
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Beginning Balance of Lease Liability
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Interest on Lease Liability
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Reduction of Lease liability
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Cash Lease payment
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Ending Balance of Lease Liability
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4. Use straight-line depreciation and prepare the journal entry to depreciate the leased asset at the end of year 1. Assume zero salvage value and a five-year life for the office equipment.