Problem
Martinez Inc. was incorporated in 2016 to operate as a computer software service firm with an accounting fiscal year ending August 31. Martinez's primary product is a sophisticated online inventory-control system; its customers pay a fixed fee plus a usage charge for using the system.
Martinez has leased a large, Alpha-3 computer system from the manufacturer. The lease calls for a monthly rental of $41,000 for the 144 months (12 years) of the lease term. The estimated useful life of the computer is 15 years.
Each scheduled monthly rental payment includes $2,700 for full-service maintenance on the computer to be performed by the manufacturer. All rentals are payable on the first day of the month beginning with August 1, 2017, the date the computer was installed and the lease agreement was signed. The lease is noncancelable for its 12-year term, and it is secured only by the manufacturer's chattel lien on the Alpha-3 system.
This lease is to be accounted for as a capital lease by Martinez, and it will be depreciated by the straight-line method with no expected salvage value. Borrowed funds for this type of transaction would cost Martinez 12% per year (1% per month). Following is a schedule of the present value of $1 for selected periods discounted at 1% per period when payments are made at the beginning of each period.
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Periods (months)
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Present Value of $1 per Period
Discounted at 1% per Period
|
|
1
|
1.000
|
|
2
|
1.990
|
|
3
|
2.970
|
|
143
|
76.658
|
|
144
|
76.899
|
Prepare all entries Martinez should have made in its accounting records during August 2017 relating to this lease. Remember, August 31, 2017, is the end of Martinez's fiscal accounting period and it will be preparing financial statements on that date. Do not prepare closing entries.