Journal Entries for Capital Leases
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On January 1, 2008, Burke Corporation signed a 5 year noncancelable lease for a machine. The terms of the lease called for Burke to make annual payments of $8,668 at the beginning of each year, starting Jan. 1, 2008. The machine has an estimated useful life of 6 years. The machine reverts back to the lessor at the end of the lease term. Burke uses the straight-line method of depreciation for all of its plant assets. Burke's incremental borrowing rate is 10%, and the Lessor's implicit rate is unknown.
Instructions:
a. What type of lease is this? Explain
b. Compute the present value of the minimum lease payments.
c. Prepare all necessary journal entries for Burke for this lease through Jan. 1, 2009.
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Solution Summary
On January 1, 2008, Burke Corporation signed a 5 year noncancelable lease for a machine. The terms of the lease called for Burke to make annual payments of $8,668 at the beginning of each year, starting Jan. 1, 2008. The machine has an estimated useful life of 6 years. The machine reverts back to the lessor at the end of the lease term. Burke uses the straight-line method of depreciation for all of its plant assets. Burke's incremental borrowing rate is 10%, and the Lessor's implicit rate is unknown.
Instructions:
a. What type of lease is this? Explain
b. Compute the present value of the minimum lease payments.
c. Prepare all necessary journal entries for Burke for this lease through Jan. 1, 2009.
Solution Preview
a. This is a capital lease. "The Financial Accounting Standards Board has ruled that a lease should be treated as an capital lease if it meets any one of the following four conditions -
(a) if the lease ...
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