Chapter 14, Problem 11APSA

To determine

Capital Lease:

A lease agreement is an agreement where the owner of assets (referred as lessor) agreed to provide the owned assets to another person (referred as lessee) on regular rental payments (referred as lease payment). The lease is termed as Capital lease when the following conditions are satisfied:

-When the lease agreement is for at least 75% of economic life of assets.

-When the accumulated lease rentals accounts for 90% of market value of assets.

The lease which has been termed as Capital lease, the lessee will show the leased asset as his own asset and lease rentals as its liability as is the lessee has purchased the assets with borrowed funds. As and when the lease rentals are paid, it will be divided as interest and principal repayment just as repayment of borrowed funds. Also, as the lessee is allowed to show the assets in his books therefore, the benefit of depreciation expense is also available to the lessee.

Requirement1:

To Determine: ThePresent values of lease rentals paid for five years.

To determine

Requirement 2:

To determine: Journal entry for recording the inception of capital lease.

To determine

Requirement3:

To Determine: The lease payment schedule shall be prepared.

To determine

Requirement4:

To Determine: The Journal entry required for the depreciation of leased asset.