Reference no: EM132663757

Question - Please explain how to approach this? Aden Company signs a lease agreement dated January 1, 2016, that provides for it to lease heavy equipment from Scott Rental Company beginning January 1, 2016. The lease terms, provisions, and related events are as follows:

1. The lease term is 4 years. The lease is noncancelable and requires annual rental payments of $20,000 to be paid in advance at the beginning of each year.

2. The cost, and fair value, of the heavy equipment to Scott at the inception of the lease is $68,036.62. The equipment has an estimated life of 4 years and has a zero estimated residual value at the end of this time.

3. Aden agrees to pay all executory costs.

4. The lease contains no renewal or bargain purchase option.

5. Scott's interest rate implicit in the lease is 12%. Aden is aware of this rate, which is equal to its borrowing rate.

6. Aden uses the straight-line method to record depreciation on similar equipment.

7. Executory costs paid at the end of the year by Aden are:

2016 Insurance, $1,500 2017 Insurance, $1,300

2016 Property taxes, $6,000 2017 Property taxes, $5,500

Required -

1. Next Level Examine and evaluate each capitalization criteria and determine what type of lease this is for Aden.

2. Make table summarizing the lease payments and interest expense for Aden.

3. Make journal entries for Aden for the years 2016 and 2017.