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    Accounting for a Capital Lease for Horton Company

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    Horton Company, as lessee, enters into a lease agreement on July 1, 2008, for equipment. The following data are relevant to the lease agreement:
    1. The term of the noncancelable lease is 4 years, with no renewal option. Payments of $422,689 are due on June 30 of each year.
    2. The fair value of the equipment on July 1, 2008 is $1,400,000. The equipment has an economic life of 6 years with no salvage value.
    3. Horton depreciates similar machinery it owns on the sum-of-the-years'-digits basis.
    4. The lessee pays all executory costs.
    5. Horton's incremental borrowing rate is 10% per year. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease payments (present value factor for 4 periods at 8%, 3.31213; at 10%, 3.16986.

    (a) Indicate the type of lease Horton Company has entered into and what accounting treatment is applicable.
    (b) Prepare the journal entries on Horton's books that relate to the lease agreement for the following dates: (Round all amounts to the nearest dollar. Include a partial amortization schedule.)
    1. July 1, 2008.
    2. December 31, 2008.
    3. June 30, 2009.
    4. December 31, 2009.

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    Solution Summary

    This solution indicates what type of lease this is and provides journal entries, the lease amortization schedule and the depreciation schedule in an attached Excel file.