FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Question
Eubank Company, as lessee, enters into a lease agreement on July 1, 2018, for equipment. The following data are relevant to the lease agreement:
- The term of the noncancelable lease is 4 years, with no renewal option. Payments of $978,446 are due on July 1 of each year.
- The fair value of the equipment on July 1, 2018 is $3,500,000. The equipment has an economic life of 6 years with no salvage value.
- Eubank
depreciates similar machinery it owns on the double-declining balance basis. - The lessee pays all executory costs.
- Eubank’s incremental borrowing rate is 10% per year. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease payments (present value factor for 4 periods at 8%, 3.57710; at 10%, 3.48685).
Instructions
(a) Indicate the type of lease Eubank Company has entered into and what accounting treatment is applicable.
This is a capital lease; therefore, it should be accounted for by the capital lease method.
(b) Prepare the
- July 1, 2018.
- December 31, 2018.
- July 1, 2019.
- December 31, 2019.
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