Reference no: EM131773325

corporation as lessee, enters into a lease agreement on July 1, 2012, for equipment. The following data are relevant to the lease agreement:

i. The term of this non-cancelable lease is 4 years, with no renewal option. Payments of $234,827 are due at the July 1, 2012 signing and each July 1st during the term of the lease agreement.

ii. The fair value of the equipment on July 1, 2012 is $840,000. The equipment has an economic life of 6 years with no salvage value.

iii. corporation depreciates similar machinery it owns on the straight-line basis, for the portion of the year depreciable, on their books.

iv. The lessee pays all executory costs.

v. corporation'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. The present value factor for an annuity due of 4 periods at 8% is 3.5771; at 10% it is 3.48685.

INSTRUCTIONS

Indicate the type of lease corporation has entered into operating or capital and why it is that type.

Briefly describe how this treatment is better or not for a potential investor, when they read corporation's financial statements.

Provide a partial amortization schedule, sufficient to support journal entries through December 31, 2013

Prepare the journal entries on corporation's books that relate to the lease agreement for the following 4 dates: (Round all amounts to the nearest dollar)

1. July 1, 2012.

2. December 31, 2012

3. July 1, 2013.

4. December 31, 2013.