Ahlia Company, as lessee, enters into a lease agreement on July 1, 2017, for equipment. The following data are relevant
Posted: Tue Nov 16, 2021 9:10 am
Ahlia Company, as lessee, enters into a lease agreement on July
1, 2017, for equipment. The following data are relevant to the
lease agreement: 1. The term of the noncancelable lease is 5 years,
with no renewal option. Payments of $500,000 are due on June 30 of
each year. 2. The fair value of the equipment on July 1, 2017, is
$1,699,635. The equipment has an economic life of 8 years with no
salvage value. 3. Ahlia depreciates similar machinery it owns on
the straight-line method. 4. The lessee pays all executory costs.
5. Ahlia’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 5 periods at 8%,
3.399270; at 10%, 3.79079.) Instructions (a) Indicate the type of
lease Ahlia Company has entered into and what accounting treatment
is applicable. (3 marks) (b) Prepare the journal entries on Ahlia's
books that relate to the lease agreement for the following dates:
(Round all amounts to the nearest dollar. Include a partial
amortization schedule.) (12 marks) 1. July 1, 2017. 2. December 31,
2017. 3. June 30, 2018. 4. December 31, 2018. 5. June
30,2019.
1, 2017, for equipment. The following data are relevant to the
lease agreement: 1. The term of the noncancelable lease is 5 years,
with no renewal option. Payments of $500,000 are due on June 30 of
each year. 2. The fair value of the equipment on July 1, 2017, is
$1,699,635. The equipment has an economic life of 8 years with no
salvage value. 3. Ahlia depreciates similar machinery it owns on
the straight-line method. 4. The lessee pays all executory costs.
5. Ahlia’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 5 periods at 8%,
3.399270; at 10%, 3.79079.) Instructions (a) Indicate the type of
lease Ahlia Company has entered into and what accounting treatment
is applicable. (3 marks) (b) Prepare the journal entries on Ahlia's
books that relate to the lease agreement for the following dates:
(Round all amounts to the nearest dollar. Include a partial
amortization schedule.) (12 marks) 1. July 1, 2017. 2. December 31,
2017. 3. June 30, 2018. 4. December 31, 2018. 5. June
30,2019.