Question

3- (Valor 10 puntos) On January 1, 2017, Papo's Company signed an 12-year lease agreement for equipment. Annual payments are $58,500, to be made at the beginning of each year. At the end of the lease, the equipment will revert to the lessor. The equipment has a useful life of 8 years and has no residual value. At the time of the lease agreement, the equipment has a fair value of $186,000. An interest rate of 14.5% ($18,332) and straight-line depreciation are used. Step 1: Identify the type of lease (Capital or Operating Lease) Conclusion: Step 2: Journal entries January 1, 2017 December 31, 2017 1-Depreciation Expense 2-Interest Expense GENERAL JOURNAL PAGE 1 PR. DEBIT DATE CREDIT DESCRIPTION

Answer 1

1) It is an operating lease because the ownership of the asset is not transferred to the Lessee from the Lessor after completion of the lease period. Hence, it is an operating lease.

2)

Date	Description	Debit	Credit
Jan. 1, 2017	Lease Liability	$58,500
	Cash		$58,500
	(To record the payment of annual lease amount)
Dec. 31, 2017	Depreciation Expense - Equipment ($186,000 - $0/8 years)	$23,250
	Accumulated Depreciation		$23,250
	(To record the depreciation expense on equipment)
Dec. 31, 2017	Interest Expense	$18,332
	Interest Payable		$18,332
	(To record the interest expense is incurred)