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.

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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Eubank Company, as lessee, enters into a lease agreement on July 1, 2018, for equipment. The following data are relevant to the lease agreement:

  1. 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.
  2. 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.
  3. Eubank depreciates similar machinery it owns on the double-declining balance basis.
  4. The lessee pays all executory costs.
  5. 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 journal entries on Eubank’s books that relate to the lease agreement for the following dates: (Round all amounts to the nearest dollar.)

  1. July 1, 2018.
  2. December 31, 2018.
  3. July 1, 2019.
  4. December 31, 2019.
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