Question: Timothy Company signs a lease agreement dated January 1, 2016 with Jasper Company for equipment. The lease terms, provisions, and related events are as follows:
1) Timothy agrees to pay all executory costs
2) The lease does not contain any renewal or bargain purchase options.
3) The lease term is 6 years. The lease is noncancelable and requires equal rental payments to be made at the end of each year.
4) The equipment has an estimated useful life of 7 years, fair value of $225,000, and does not have a residual value.
5) The annual payment is set by Jasper at $51,661.67 to earn a rate of return of 10%. Timothy is aware of the rate and it is equal to its borrowing rate.
6) Timothy uses the straight line method of depreciation on all of its equipment.
Required: 1) Determine whether the lease is an operating lease or a capital lease for the lessee
2) Calculate the amount of the asset and liability of Timothy at the inception of the lease.
3) Prepare the amoritization table for the lease and interest expense.
4) Prepare the journal entries for Timothy for 2016.