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 journal entries on Eubank’s books that relate to the lease agreement for the following dates: (Round all amounts to the nearest dollar.) July 1, 2018. December 31, 2018. July 1, 2019. December 31, 2019.
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 journal entries on Eubank’s books that relate to the lease agreement for the following dates: (Round all amounts to the nearest dollar.) July 1, 2018. December 31, 2018. July 1, 2019. December 31, 2019.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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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