Lessee accounting—capital lease. Eubank Company, as lessee, enters into a lease agreement on July 1, 2014, for equipment. The following data are relevant to the lease agreement:
1. The term of the non cancelable lease is 4 years, with no renewal option. Payments of $782,757 are due on July 1 of each year.
2. The fair value of the equipment on July 1, 2014 is $2,800,000. The equipment has an economic life of 6 years with no salvage value.
3. Eubank depreciates similar machinery it owns on the sum-of-the-years’-digits basis.
4. The lessee pays all executor costs.
5. Eubank’s incremental borrowing rate is 10% per year. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease payments (present value factor for 4 periods at 8%, 3.57710; at 10%, 3.48685.
Instructions
(a) Indicate the type of lease Eubank Company has entered into and what accounting treatment is applicable.
(b) Prepare the journal entries on Eubank’s books that relate to the lease agreement for the following dates: (Round all amounts to the nearest dollar. Include a partial amortization schedule.)
1. July 1, 2014.
2. December 31, 2014.
3. July 1, 2015.
4. December 31, 2015.