Punk Peddler Inc., leases its carts which it uses to sell trinkets. On Jan 1, 2014, the company leased 5 carts and agreed to make lease payments of $20,000 (total for five carts) each year. The lease contract has a term of five years, after which the carts can be purchased by Junk Peddler for a nominal price. Assume an effective rate of 10 percent.
A. Compute the annual rental expense if the lease is treated as an operating lease.
B. Prepare the journal entry on Jan 1, 2014 if the lease is treated as a capital lease. Compute the total expense associated with the lease during the first year if the lease is treated as a capital lease.
C. How can the leases be arranged to treat them as operating method of treatment rather than capital method?