Lessee accounting-capital lease
Long Ltd., a private corporation adhering to ASPE, enters into a non-cancellable lease agreement on July 1, 2020, to lease equipment from Fong Ltd. The following data are relevant to the lease agreement:
1. The term of the lease is 4 years, with no renewal option. Payments of $ 126,807 are due on June 30 of each year, with the first payment due June 30, 2021.
2. The fair value of the equipment on July 1, 2020 is $ 420,000. The equipment has an economic life of 6 years with no residual value.
3. Long depreciates similar equipment it owns on the double declining-balance basis.
4. Long's incremental borrowing rate is 10%. The lessee is aware that the lessor used an implicit rate of 8% in calculating the lease payments.
5. Present value factor for 4 periods at 8% is 3.31213; at 10%, 3.16986.
Instructions
a) What type of lease this is for Long? What is your rationale?
b) Prepare the journal entries on Long's books that relate to the lease agreement for the following dates. Round all amounts to the nearest dollar. Include a partial amortization schedule.
i. July 1, 2020
ii. December 31, 2020
iii. June 30, 2021
iv. December 31, 2021

Question

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The Answer of Lessee accounting-capital lease
Long Ltd., a private corporation adhering to ASPE, enters into a non-cancellable lease agreement on July 1, 2020, to lease equipment from Fong Ltd. The following data are relevant to the lease agreement:
1. The term of the lease is 4 years, with no renewal option. Payments of $ 126,807 are due on June 30 of each year, with the first payment due June 30, 2021.
2. The fair value of the equipment on July 1, 2020 is $ 420,000. The equipment has an economic life of 6 years with no residual value.
3. Long depreciates similar equipment it owns on the double declining-balance basis.
4. Long's incremental borrowing rate is 10%. The lessee is aware that the lessor used an implicit rate of 8% in calculating the lease payments.
5. Present value factor for 4 periods at 8% is 3.31213; at 10%, 3.16986.
Instructions
a) What type of lease this is for Long? What is your rationale?
b) Prepare the journal entries on Long's books that relate to the lease agreement for the following dates. Round all amounts to the nearest dollar. Include a partial amortization schedule.
i. July 1, 2020
ii. December 31, 2020
iii. June 30, 2021
iv. December 31, 2021

Lessee Accounting-Capital Lease Long Ltd., a Private Corporation Adhering to ASPE, Enters into ASPE