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Q21-8P_c.

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Intermediate Accounting (Kieso)
Found in: Page 1247

Short Answer

Question: (Lessee Entries and Balance Sheet Presentation, Capital Lease) On January 1, 2017, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of $137,899 (including the executory costs of $6,000) at the beginning of each year, starting January 1, 2017. The taxes, the insurance, and the maintenance, estimated at $6,000 a year, are the obligations of the lessee. The leased equipment is to be capitalized at $550,000. The asset is to be depreciated on a double-declining-balance basis, and the obligation is to be reduced on an effective-interest basis. Cage’s incremental borrowing rate is 12%, and the implicit rate in the lease is 10%, which is known by Cage. Title to the equipment transfers to Cage when the lease expires. The asset has an estimated useful life of 5 years and no residual value.

Instructions

(c) Prepare the journal entry to record depreciation of the leased asset for the year 2017.

Accumulated depreciation is$220,000.

See the step by step solution

Step by Step Solution

Step 1: Meaning of Depreciation

Depreciation is a reduction in the price of a tangible asset that affects the asset's monetary worth owing to a range of factors such as wear and tear from extended usage.

Step 2: Preparing journal entries

Date

Particular

Debit ($)

Credit ($)

Depreciation Expense

220,000

Accumulated Depreciation

Capital Leases

220,000

Working Notes:

Calculation of accumulated depreciation-capital lease

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