Question

On January 1,2017, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of $120,987 at the beginning of each year, starting January 1, 2017. The leased equipment is to be capitalized at $550,000. The asset is to be amortized on a double-declining balance basis, and the obligation is to be reduced on an effective-interest basis. Cage's incremental borrowing rate is 6%, and the implicit rate in the lease is 5%, which is known by Cage. Title to the equipment transfers to Cage at the end of the lease. The asset has an estimated useful life of 5 years and no residual value Instructions: (a) Prepare the journal entry or entries that Cage should record on January 1, 2017. (Show two separate entries. One for recording the leased asset and one to record the initial payment) (b) Prepare the journal entries to record amortization of the leased asset and interest expense for the year 2017. Include an amortization schedule (c) Prepare the journal entry to record the lease payment of January 1, 2018, assuming reversing entries are not made. (The assumption referenced in this question means that there was no initial accrual of the interest expense with a corresponding credit to interest payable. Therefore, there would be no reversing entry made at the time of payment (i.e. no debit to interest payable to reverse the accrual). So what accounts would be affected when this journal entry is made assuming these facts?) (d) What amounts will appear on the lessee's December 31, 2017 balance sheet relative to the lease contract? Prepare a partial balance sheet showing the amounts. (Hint: Both assets and liabilities have been affected. Make sure to break down the liabilities into their current vs.

Answer 1

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