Accounting for Leased Assets
Response to the following problem:
On January 2, 2009, Yardley Company contracted to lease a computer on a noncancelable basis for six years at an annual rental of $55,000, payable at the end of each year. The computer has an estimated economic life of seven years. There is no bargain purchase option, and the computer will be returned to the lessor at the end of the six-year term of the lease. At the beginning of the lease, the computer has a fair market value of $245,000, and the present value of the lease payments equals $239,539.
Required:
1. Is this a capital lease or an operating lease? Explain.
2. Assuming that the lease is an operating lease, prepare the journal entries for Yardley Company for 2009.
3. Assuming that the lease is a capital lease, prepare the journal entries for Yardley Company for 2009. Assume the lease payment at the end of 2009 includes interest of $23,954.