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 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.

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Answered: Indicate the type of lease Eubank…

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter20: Accounting For Leases

Section: Chapter Questions

Problem 1E: Determining Type of Lease and Subsequent Accounting On January 1, 2019, Caswell Company signs a...

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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:

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 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.

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