On December 15, 2015, Lenny entered into a three-year
non-cancellable lease with Emmy
Leasing for the lease of specialized equipment. The lease commences
in January 1, 2016 and
requires Lenny to make three lease payments of $200,000 each, on
January 1, 2016, December
31, 2016 and December 31, 2017.
On March 31, 2017, following the issuance of their annual financial
statements Lenny
discovered the error in accounting for the lease. All lease
payments made in 2016 had been
recorded as if the lease was an operating lease however, the lease
should have been
accounted for as a capital lease.
The fair value of the leased equipment on the January 1, 2016 was
$548,000 and the expected
useful life was 3 years with a residual value of $38,000. The lease
did not contain a purchase
option or guaranteed residual value. The implicit rate in the lease
is 10% (and is known by
the lessee) and the effective tax rate of Lenny is 40%. Lenny uses
the straight-line depreciation
method which is approximately the same for tax reporting
purposes.
Prepare the original entries made in 2016 for the lease as an operating lease:
Prepare the entries that should have been made in 2016 to record
the lease as a capital
lease:
Prepare the correcting entry to be made in 2017 when the error was discovered:
YEARS | LP | PVF | PV |
1 | 200000 | 1 | 200000 |
2 | 200000 | 0.909091 | 181818.2 |
3 | 200000 | 0.826446 | 165289.3 |
547107.4 |
a) original entries made in 2016 for the lease as an operating lease
Lease payments | 200000 | |
Bank | 200000 |
b) entries that should have been made in 2016 to record the
lease as a capital
lease
Right to use asset | 547107 | |
Lease liability | 547107 |
c) Correcting entries to be made
SL No | Particulars | Debit | Credit |
1 | For reversing the lease payment effect | ||
Lease liability | 381818 | ||
Interest payments | 18182 | ||
Retained earnings | 400000 | ||
2 | Depreciation | 182369 | |
Accumulated depreciation | 182369 | ||
3 | Income tax | 79780 | |
retained earnings | 79780 |
On December 15, 2015, Lenny entered into a three-year non-cancellable lease with Emmy Leasing for...
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