Question

E 15?3: Capital lease; lessee

Manufacturers Southern leased high-tech electronic equipment from Edison Leasing on January 1, 2013. Edison purchased the equipment from International Machines at a cost of $112,080

Manufacturers Southern leased high-tech electronic equipment from Edison Leasing on January 1, 2013. Edison purchased the equipment from International Machines at a cost of $112,080 Prepare a lease amortization schedule and appropriate entries for Manufacturers Southern from the inception of the lease through January 1, 2014. Depreciation is recorded at the end of each fiscal year (December 31) on a straight-line basis.

Required:

Prepare a lease amortization schedule and appropriate entries for Manufacturers Southern from the inception of the lease through January 1, 2014. Depreciation is recorded at the end of each fiscal year (December 31) on a straight-line basis.

Answer 1

Concepts and reason

Lease: Lease is an agreement for the user to pay the owner for the use of an asset. Lessor and lessee are the two parties in a lease contract. Owner of the asset is called as lessor and user of the asset is called as lessee.

Capital Lease: A capital lease refers to the lease in which the lessor transfers the ownership of the leased assets to the lessee on the maturity of the lease period. It is non-cancellable in nature, is of relatively long-term, and can be capitalized.

Lease amortization schedule: It is a schedule prepared for calculating the interest revenue on lease receivable, lease receivable balance and recovery of lease receivable.

Lease Payable: Lease Payable is a situation where an asset leased from the leasing company. Lease payable are born at the time of lease agreement. It is the amount owed by the lessee to the lessor.

Fundamentals

Accounting Equation: This is a mathematical equation, which represents the association between assets, liabilities and stockholders’ equity. This is also called as balance sheet equation. It is represented as follows

Asset: The source, which is possessed or controlled to generate income in the future, is known as an asset. Examples: Accounts Receivable, Cash, Prepaid expense and supplies.

Liability: Liability is an agreement made by the company to pay a certain amount for the goods or services received by the company in the past. Examples: Accounts Payable, Unearned service revenue, and Salaries and wages payable.

Stockholders’ equity: Stockholders’ equity refers to the shareholders claims on the assets or resources of a company, and so known as net assets of the company, which are assets minus liabilities. Examples: Retained Earnings, Dividends, and Capital.

Revenue: Revenue is the total income earned by an organization by selling goods or rendering services. Examples: Sales revenue, Service revenue, and gain from sale of investment.

Expense: Expense is the cost borne by a company to produce and sell the goods and services to the customers. Examples: Salaries and wages expense, Utilities expense, Insurance expenses, and Depreciation Expense.

Journal entry: Journal is the book of original entry whereby all the financial transactions are recorded date-wise with the debit and credit entry to the respective accounts in transaction. Journal entry is the primary books of accounts for any entity to record the daily transactions and processed further till the presentation of the financial statements.

Rules of debit and credit: The category of accounts determines how the increases and decreases are recorded in the said account. In other words, the account category determines the rule of debit and credit for that particular account. The following are the rules of debit and credit:

Debit increases all asset accounts and expenses. Debit decreases all liabilities, stockholders’ equity account and revenues.

Credit increases all liabilities, stockholders’ equity account and revenue account. Credit decreases all asset accounts and expenses.

Prepare lease amortization schedule.

Working note:

Calculate the present value of minimum lease payments.

Use the present value factor 7.47199 (Present value of an annuity of $1 for 8 periods at 2% rate).

Prepare the journal entries in the books of Manufactures S on January 1, 2013:

Prepare journal entries in the books of Manufactures S on April 1, 2013:

Prepare journal entries in the books of Manufactures S on July 1, 2013:

Prepare journal entries in the books of Manufactures S on October 1, 2013:

Prepare journal entries in the books of Manufactures S on December 31, 2013

Working note:

Calculation of depreciation expense:

Prepare journal entries in the books of Manufactures S on January 1, 2014:

Ans: