Questions 1-3 On 1/1/2012 ABC, Inc. enters into a 20-year non-cancelable lease for a piece of machinery owned by XYZ, Inc. The lease calls for annual payments of $20,000, payable at the beginning of each year of the lease (i.e. first payment due on 1/1/2012). At the end of the lease, the right to use the machine transfers back to XYZ. ABC, Inc. declined the choice to purchase the machine outright for $800,000, and the economic life of the machine is believed to be 30 years. There is also an option to renew the lease for an additional 10 years at a reduced rate of $19,000. This does not represent a bargain renewal option that ABC, Inc. is reasonably certain to use. ABC, Inc. uses a 5% discount rate to calculate present values, and generally uses straight line depreciation to depreciate machines assuming a 0% salvage value. In addition, ABC, Inc. spends $20,000 to customize the machinery for use in their factory. They believe that this customization has a useful life of 10 years. What type of lease is this from the perspective of ABC, Inc.? Group of answer choices Operating Capital What (if any) journal entry(ies) should ABC, Inc. record on 1/1/2012? What (if any) journal entry(ies) should ABC, Inc. record on 12/31/20122
Questions 1-3 On 1/1/2012 ABC, Inc. enters into a 20-year non-cancelable lease for a piece of machinery owned by XYZ, Inc. The lease calls for annual payments of $20,000, payable at the beginning of each year of the lease (i.e. first payment due on 1/1/2012). At the end of the lease, the right to use the machine transfers back to XYZ. ABC, Inc. declined the choice to purchase the machine outright for $800,000, and the economic life of the machine is believed to be 30 years. There is also an option to renew the lease for an additional 10 years at a reduced rate of $19,000. This does not represent a bargain renewal option that ABC, Inc. is reasonably certain to use. ABC, Inc. uses a 5% discount rate to calculate present values, and generally uses straight line depreciation to depreciate machines assuming a 0% salvage value. In addition, ABC, Inc. spends $20,000 to customize the machinery for use in their factory. They believe that this customization has a useful life of 10 years. What type of lease is this from the perspective of ABC, Inc.? Group of answer choices Operating Capital What (if any) journal entry(ies) should ABC, Inc. record on 1/1/2012? What (if any) journal entry(ies) should ABC, Inc. record on 12/31/20122
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:Questions 1-3
On 1/1/2012 ABC, Inc. enters into a 20-year non-cancelable lease for a piece of
machinery owned by XYZ, Inc. The lease calls for annual payments of
$20,000, payable at the beginning of each year of the lease (i.e. first payment due on
1/1/2012). At the end of the lease, the right to use the machine transfers back to XYZ.
ABC, Inc. declined the choice to purchase the machine outright for $800,000, and the
economic life of the machine is believed to be 30 years. There is also an option to
renew the lease for an additional 10 years at a reduced rate of $19,000. This does
not represent a bargain renewal option that ABC, Inc. is reasonably certain to use.
ABC, Inc. uses a 5% discount rate to calculate present values, and generally uses
straight line depreciation to depreciate machines assuming a 0% salvage value. In
addition, ABC, Inc. spends $20,000 to customize the machinery for use in their factory.
They believe that this customization has a useful life of 10 years.
What type of lease is this from the perspective of ABC, Inc.?
Group of answer choices
Operating
Capital
What (if any) journal entry(ies) should ABC, Inc. record on 1/1/2012?
What (if any) journal entry(ies) should ABC, Inc. record on 12/31/2012?
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