Reference no: EM133114312
Question - On April 1, 2020, Wareham Company leased equipment from Dean, Inc. Lease payments are $7,500, with the first of 7 payments (annual, quarterly, or monthly, see questions below) made on April 1, 2020. Wareham will return the equipment to Dean at the end of the lease term. The lease is non-cancellable and Wareham does not have the option to buy the equipment at the end of the lease term.
Additional facts:
The equipment has a $40,000 carrying value on Dean's books; its current sales price (i.e., its fair value) is $70,000. Its estimated economic life is 9 years on April 1, 2020. Dean set the present value of the lease payments to equal the asset's fair value.
The interest rate implicit in the lease, which is known by Wareham, is 3% per period. Wareham's incremental borrowing rate is 4% per period.
Wareham uses the straight-line method for amortization, when appropriate.
Although the payments are annual, quarterly, or monthly, all of the information above is the same (for example, the 3% implicit rate is an annual, monthly, or quarterly rate, depending on the question below). Therefore, there is only one amortization table, although the 7 periods are annual, monthly, or quarterly.
You need to prepare the amortization table. Use Excel, it's great practice. You can use most of the examples I provide to see how to prepare the tables.
Required -
1. What are total expenses related to the lease in 2021 if it is classified as:
a. Finance lease (payments are annual)
b. Long-term operating lease (payments are quarterly)
c. Short-term operating lease (payments are monthly)
2. What are total current liabilities on 12/31/21 if the lease is classified as:
a. Finance lease (payments are annual)
b. Long-term operating lease (payments are quarterly)
c. Short-term operating lease (payments are monthly)
3. What is the book value of the leased asset on 12/31/21 if the lease is classified as:
a. Finance lease (payments are annual)
b. Long-term operating lease (payments are quarterly)
c. Short-term operating lease (payments are monthly)