Case Scenario: Casey King Enterprises entered into two noncancelable leases for new machines to be used in its manufacturing operations. The first lease does not contain a bargain purchase option; the lease term is equal to 80% of the estimated economic life of the machine. The second lease contains a bargain purchase option; the lease term is equal to 50% of the estimated economic life of the machine.
Question 1. How should a lessee account for a capital lease at its inception? Give a sample journal entry of the items to be posted. Include the formulas and calculations needed to determine the amount for each line in the sample journal entry.
Question 2. How should a lessee record each minimum lease payment for a capital lease? Again, give a sample journal entry of the items to be posted. Include the formulas and calculations needed to determine the amount for each line in the sample journal entry.
Question 3. How should a lessee report a capital lease on its balance sheet and its income statement at the end of the year?
Question 4. How should a lessee report an operating lease on its balance sheet and income statement each year?