Problem:
ACCOUNTING BY LESSEE
Criteria for capital lease (must meet one)
Transfer of ownership
Bargain purchase option
Economic life test (75%)
Recovery of investment test (90%)
Treat as operating lease if none of the above criteria are met
On January 1, 2014, Adams Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Adams to make annual payments of $9,968 at the beginning of each year, starting January 1, 2014. The machine has an estimated useful life of 6 years and a $5,000 unguaranteed residual value. Adams uses the straight-line method of depreciation for all of its plant assets. Adams's incremental borrowing rate is 10%, and the lessor's implicit rate is unknown
Instructions
What type of lease is this? Explain.
Compute the present value of the minimum lease payments. (PV factor 4.16986)
Prepare all necessary journal entries for Adams for this lease through January 1, 2015
RECOVERY OF INVESTMENT TEST
Minimum lease payments
Minimum rental payments
Guaranteed residual value
Penalty for failure to renew or extend the lease
Bargain purchase option
Executory costs
Discount rate