Reference no: EM133183778
Question - Jordan Inc. has entered into a lease agreement with MKG Leasing Co. to lease some specialized manufacturing equipment. The terms of the lease are as follows:
The lease is for 5 years commencing January 1, 2020.
Jordan must pay MKG $54,114 on January 1 of each year, beginning in 2020.
Equipment of this type normally has an economic life of 6 years.
MKG has concluded, based on its review of Jordan's financial statements, that there is no unusual credit risk in this situation. MKG will not incur any further costs with regard to this lease.
MKG purchases this equipment directly from the manufacturer at a cost of $199,625, and normally sells the equipment for $251,625.
Jordan's borrowing rate is 7%. MKG's implied interest rate is 6%, which is known to Jordan at the time of negotiating the lease.
Jordan uses the straight-line method to depreciate similar equipment.
Both Jordan and MKG have calendar fiscal years (year end December 31) and follow ASPE.
Required -
1) From Jordan's perspective, is this a capital or operating lease?
2) Prepare a lease amortization schedule for this lease.
3) Prepare the journal entries on Jordan's books on January 1, 2020.
4) Prepare the journal entries on MKG Leasing's books on January 1, 2020.
5) Prepare the journal entries for Jordan on December 31, 2020.
6) Prepare the journal entry on MKG Leasing's books on December 31, 2020.
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