On January 1, 2019, Carey Inc. entered into a noncancelable lease agreement, agreeing to pay $3,398 at the end of each year for 4 years to acquire a new computer system having a market value of $9,901. The expected useful life of the computer system is also 4 years, and the computer will be depreciated on a straight-line basis with no salvage value. The interest rate used by the lessor to determine the annual payments was 14%. Under the terms of the lease, Carey has an option to purchase the computer for $1 on January 1, 2023. See Table 6-5. (Use the appropriate factor by clicking on the Table link.) Required: a. Should Carey Inc. account for this lease as a financing lease or an operating lease? b. Prepare the horizontal model and record the journal entry that Carey Inc. should make on January 1, 2019. (Hint. First determine the present value of future lease payments.) c. Prepare the horizontal model and record the journal entry that Carey Inc. should make on December 31, 2019, to record the first annual lease payment of $3,398. (Hint: Based on your answer to part b, determine the appropriate amounts for interest and principal.) Indicate the financial statement effect. d. What expenses (include amounts) should be recognized for this lease on the income statement for the year ended December 31, 2019? e. The accounting for an asset acquired under a capital lease
On January 1, 2019, Carey Inc. entered into a noncancelable lease agreement, agreeing to pay $3,398 at the end of each year for 4 years to acquire a new computer system having a market value of $9,901. The expected useful life of the computer system is also 4 years, and the computer will be depreciated on a straight-line basis with no salvage value. The interest rate used by the lessor to determine the annual payments was 14%. Under the terms of the lease, Carey has an option to purchase the computer for $1 on January 1, 2023. See Table 6-5. (Use the appropriate factor by clicking on the Table link.) Required: a. Should Carey Inc. account for this lease as a financing lease or an operating lease? b. Prepare the horizontal model and record the journal entry that Carey Inc. should make on January 1, 2019. (Hint. First determine the present value of future lease payments.) c. Prepare the horizontal model and record the journal entry that Carey Inc. should make on December 31, 2019, to record the first annual lease payment of $3,398. (Hint: Based on your answer to part b, determine the appropriate amounts for interest and principal.) Indicate the financial statement effect. d. What expenses (include amounts) should be recognized for this lease on the income statement for the year ended December 31, 2019? e. The accounting for an asset acquired under a capital lease
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 3E: Lessee Accounting Issues Sax Company signs a lease agreement dated January 1, 2019, that provides...
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Transcribed Image Text:On January 1, 2019, Carey Inc. entered into a noncancelable lease agreement, agreeing to pay $3,398 at the end of each year for 4
years to acquire a new computer system having a market value of $9,901. The expected useful life of the computer system is also 4
years, and the computer will be depreciated on a straight-line basis with no salvage value. The interest rate used by the lessor to
determine the annual payments was 14%. Under the terms of the lease, Carey has an option to purchase the computer for $1 on
January 1, 2023. See Table 6-5. (Use the appropriate factor by clicking on the Table link.)
Required:
a. Should Carey Inc. account for this lease as a financing lease or an operating lease?
b. Prepare the horizontal model and record the journal entry that Carey Inc, should make on January 1, 2019. (Hint. First determine the.
present value of future lease payments.)
c. Prepare the horizontal model and record the journal entry that Carey Inc. should make on December 31, 2019, to record the first
annual lease payment of $3,398. (Hint. Based on your answer to part b, determine the appropriate amounts for interest and
principal.) Indicate the financial statement effect.
d. What expenses (include amounts) should be recognized for this lease on the income statement for the year ended December 31,
2019?
e. The accounting for an asset acquired under a capital lease
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