Problem
On January 1, 2014, Krusty the Clown, Owner of Krusty Burger, leased equipment for a three-year period ending December 31, 2016. The lease agreement specifies annual lease payments of $36,000, with the first payment due at the inception of the lease. Krusty has the option to purchase the equipment on December 30, 2016 for $45,000 when its fair value is expected to be $60,000. The equipment's estimated life was six years with no salvage value. Krusty uses the straight-line method. The Lessor's implicit rate of return and Krusty's incremental borrowing rate are 12%.
Calculate the amount Krusty Burger (i.e., lessee) should record as a leased asset & leased liability.
Prepare the appropriate journal entries for Krusty Burger on January 1, 2014
Prepare an amortization schedule describing the pattern of interest over the lease term.
Prepare the appropriate journal entry/entries for Krusty Burger on December 31, 2014.
Prepare the appropriate entry/entries for Krusty Burger on December 30, 2016 assuming that Krusty Burger purchases the equipment.