On January 1, 2012, Porter Corporation signed a five-year non-cancelable lease for certain machinery.The terms of the lease called for:
1) Price to make annual payments of \$60,000 at the end of each year (starting an Dec. 31, 2012) Far Ene years. Parter must return the equigment to the lessor end of this periad.
2) The machinery has an estimated useful life of o years and no exgected salvage value.
3) Parter uses the straight-line method af depreciation far all of its fixed assets.
4) Parter's incremental barrowing rate is $8 \%$
5) The fair value of the asset at January 1,2012 is $\$ 27,000$.
-What accounting method should Porter use to account for the equipment lease?
A) Operating Lease method
B) Capital Lease method
C) Equipment Lease method
D) Lessee Accounting method

Question

On January 1, 2012, Porter Corporation signed a five-year non-cancelable lease for certain machinery.The terms of the lease called for:
 1) Price to make annual payments of \$60,000 at the end of each year (starting an Dec. 31, 2012) Far Ene years. Parter must return the equigment to the lessor end of this periad.
2) The machinery has an estimated useful life of o years and no exgected salvage value.
 3) Parter uses the straight-line method af depreciation far all of its fixed assets.
4) Parter's incremental barrowing rate is $8 \%$
5) The fair value of the asset at January 1,2012 is $\$ 27,000$.
-What accounting method should Porter use to account for the equipment lease?
A) Operating Lease method
B) Capital Lease method
C) Equipment Lease method
D) Lessee Accounting method

Quizplus · Accepted Answer

The lease agreement meets the criteria for a capital lease because:
- The lease term exceeds 75% of the estimated useful life of the asset (5 years/0 years = 100%).
- The present value of the lease payments exceeds 90% of the fair value of the asset [PV(PMT, n, i) = $264,494 > 90% x $27,000 = $24,300].
As a result, Porter Corporation should use the Capital Lease method to account for the equipment lease. This involves recording the leased asset as a fixed asset at the present value of the lease payments and depreciating it over the shorter of the lease term or useful life. The lease liability should be recorded at the present value of the lease payments and reduced as payments are made, with interest expense recognized separately.

On January 1, 2012, Porter Corporation Signed a Five-Year Non-Cancelable 8%8 \%8%

On January 1, 2012, Porter Corporation Signed a Five-Year Non-Cancelable $8 \%$