Question - Junk Peddler Inc., leases its carts, which it uses to sell trinkets. On Jan 1, 2014, the company leased a cart and agreed to make lease payments of $20,000 each year. The lease contract has a term of five years, after which the cart can be purchased by Junk Peddler for a nominal price. Assume an effective rate of 10 percent.
1. Compute the annual rental expense if the lease is treated as an operating lease.
2. Prepare the journal entry on Jan 1, 2014 if the lease is treated as a capital lease.
3. Compute the total expense associated with the lease during the first year if the lease is treated as a capital lease.