[CPApracticer]

My question is how come the answer uses the 4 years rate instead of 5. Since it has a BPO, shouldn’t be use Asset life, which is 5 years? Thank you!

Kern, Inc., leased a copier for the office. Following is the information regarding the copier lease.

•Lease period: 4 years, beginning January 1, 20X4. The lease is noncancelable.

•At the end of the lease term, the lessee has the option to purchase the copier at fair market value.

•The fair market value of the copier (were it to be purchased now) is $28,500.

•The estimated economic life of the asset is 5 years.

•The implicit interest rate of the lease is 14%.

•The lease payment is $8,750 per year, payable in advance. This amount includes $270 in executory costs.

Excerpt from “Present Value of an Ordinary Annuity” Table:

Years 14%

3 2.3216

4 2.9137

5 3.4331

On January 1, 20X4, what are the journal entries that must be made? First choose the accounts that would be affected and then fill in the numbers under debit or credit as appropriate. Although all shaded cells may not necessarily be used, an entry must be made in each cell.

To record the lease:

Answer:

To record the lease:

Debit Credit

Leased Equipment 28,167 –

Obligations Under Capital Lease – 28,167

F: 54 (4/13) 60 (4/14) 67 (9/14) 66 (10/14) 63 (11/15) 79 (2/16) PASSED
A: 60 (5/13) 80 (4/16) PASSED
R: 60 (7/13) 61 (2/15) 70 (4/15) 77 (7/15) PASSED
B: (6/16)