Reference no: EM132351220

Question - The Clare drilling company needs two new trailers, each having an estimated service life of 12 years. The trailers could be purchased for Sh50,000 each, but Clare does not have enough cash to pay for them. Instead, Clare agrees to lease Trailer 1 for four years, after which the taller remains the property of the lessor. In addition, Clare agrees to lease Trailer 2 for six years, after which the taller remains the property of the lessor. According to the lease contracts, Clare must pay Sh13,000 annually for each trailer, with the payments to be made at the end of each lease year. Both leases were signed on December 31, 2003, at which time the prevailing interest rate available to Clare for equipment loans was 14%.

Required -

a. Determine whether each of these two leases is an operating or capital lease.

b. Prepare any required entries to record entering into the lease of (a) Trailer 1 And (b) Trailer 2.

c. Prepare the entries required on December 31, 2004, for (a) Trailer 1 and (b) Trailer 2. Use straight-line depreciation for any capital leases. (Remember if the asset remains the property of the lessor, the lessee must take depredation over the capital lease).