Problem - Accounting for capital lease
Alpha Industries manufactures equipment that is sold or leased. On December 31, 2013, Alpha leased equipment to Beta Co. for a four-year period ending December 31, 2017, at which time possession of the leased asset will revert back to Alpha. The equipment cost $600,000 to manufacture and has an expected useful life of six years. Its normal sales price is $717,860. The expected residual value of $30,000 at December 31, 2017, is not guaranteed. Equal payments under the lease are $200,000 and are due on December 31 of each year. The first payment was made on December 31, 2013. Collectibility of the remaining lease payments is reasonably assured, and Alpha has no material cost uncertainties. Beta's incremental borrowing rate is 12%. Beta knows the interest rate implicit in the lease payments is 10%. Both companies use straight-line depreciation.
1. Prepare the appropriate entries for both Beta and Alpha on December 31, 2013.
2. Prepare an amortization schedules describing the pattern of interest over the lease term for the lessee and the lessor.
3. Prepare the appropriate entries for both Beta and Alpha on December 31, 2014 (the second lease payment and depreciation).