Question

Morey Corporation leases a tractor from Equity Leasing with a five-year non-cancelable lease on January 1, 2018 under the following terms: 1. Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year. 2. The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor 3. The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term. 4. The tractor has a six-year economic life. 5. Morey has an excellent credit rating. 6. Equity offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer. Both Morey and Equity use ASC 840 guidance for lease accounting. Which of the following entries will Morey prepare to record the lease of the tractor on January 1, 2018? Multiple Choice DR Leased equipment 102,607.95 CR Obligation under capital lease 102,607.95 DR Leased equipment 131,898.70 CR Cash 26,379.74 CR Obligation under capital lease 105,518.96 DR Leased equipment 131,898.70 CR Cash 131,898.70 DR Rent expense 26,379 74 CR Cash 26,379 74

Answer 1

Answer: The Lease is Finance Lease because the lease period covers major life of Asset. So, the lease is recoreded at Present Value of Minimum Lease Payments =PV(9%,5,-26379.74,0,0) $ 1,02,607.99 Therefore the entry is Account Tittle Leased Equipment Obligation under Capital Lease Debit Credit 102607.95 102607.95 The Option "a" is Correct