Vaughn Company, as lessee, enters into a lease agreement on January 1, 2022, 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 $422,689 are due on January 1 of each year. The fair value of the equipment on January 1, 2022 is $1,512,000. The equipment has an economic life of 6 years with no salvage value. Vaughn depreciates similar machinery it owns on the straight-line basis. The lessee pays all executory costs. Vaughn’s incremental borrowing rate is 10%, but Vaughn knows that 8% is the lessor’s implicit interest rate. Vaughn has a December 31 year-end. Required: Indicate the type of lease that Vaughn Company has entered into and why. Prepare an amortization table for Vaughn in Excel. Prepare the journal entries on Vaughn’s books for the first two years of the lease.
Vaughn Company, as lessee, enters into a lease agreement on January 1, 2022, 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 $422,689 are due on January 1 of each year. The fair value of the equipment on January 1, 2022 is $1,512,000. The equipment has an economic life of 6 years with no salvage value. Vaughn depreciates similar machinery it owns on the straight-line basis. The lessee pays all executory costs. Vaughn’s incremental borrowing rate is 10%, but Vaughn knows that 8% is the lessor’s implicit interest rate. Vaughn has a December 31 year-end. Required: Indicate the type of lease that Vaughn Company has entered into and why. Prepare an amortization table for Vaughn in Excel. Prepare the journal entries on Vaughn’s books for the first two years of the 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 1E: Determining Type of Lease and Subsequent Accounting On January 1, 2019, Caswell Company signs a...
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- Vaughn Company, as lessee, enters into a lease agreement on January 1, 2022, 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 $422,689 are due on January 1 of each year.
- The fair value of the equipment on January 1, 2022 is $1,512,000. The equipment has an economic life of 6 years with no salvage value.
- Vaughn
depreciates similar machinery it owns on the straight-line basis. - The lessee pays all executory costs.
- Vaughn’s incremental borrowing rate is 10%, but Vaughn knows that 8% is the lessor’s implicit interest rate.
- Vaughn has a December 31 year-end.
Required:
- Indicate the type of lease that Vaughn Company has entered into and why.
- Prepare an amortization table for Vaughn in Excel.
- Prepare the
journal entries on Vaughn’s books for the first two years of the lease.
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