Capital lease accounting for lessee. On 1/1/2014, the Dexter Company leases a piece of equipment to the Gracie Company for a five (5) year period. At this date, the equipment has a total expected remaining useful life of six (6) years. The equipment has a fair market value of $730,000 on 1/1/2014, and is carried on Dexter's (lessor) books at a cost and book value of $730,000. Dexter expects the equipment to have a residual value of $80,000 when it is returned on 12/31/2018 ($60,000 of this value is to be guaranteed by Gracie (lessee) ). Eventually, at the end of the 6th year the asset will have a residual value of $5,000 but there is no guarantee. Dexter (lessor) incurs initial direct costs of $4,000 in drawing up the lease. Gracie (lessee) incurs no legal fees. Dexter structures the annual rental payments of 152,653, due on 1/1/2014 & 1/1/2015 & 1/1/2016 & 1/1/2017 & 1/1/2018, to earn a 6.5% rate of return (the rate of interest implicit in the lease). Please notice that a lease payment is due on the date the lease is signed. Gracie is not aware of Dexter's rate.
Gracie's cost of capital is 7%. This loan is to be accounted for as a capital lease for Gracie (lessee). Should it be necessary, both Dexter and Gracie use straight-line depreciation, with a full year taken in the year of acquisition. Both Dexter and Gracie have a fiscal year that extends from January 1 to December 31 of each year.
1. Is an amortization table necessary for Gracie (lessee) to account for this lease, yes or no? If yes, please present it.
2. Prepare all necessary journal entries for 2014 and 2015 and 2016 for Gracie (lessee) to account for the lease. Assume all payments made as scheduled, and that the asset is returned as scheduled. No explanations are necessary, but provide dates for all entries.
3. Complete this table for the Gracie's (lessee) reported amounts on the financial statements.
Ppd/ Total Current Long-term Operating Non-op Operating Activities, Investing Activities Financing Activities PPE Liability Liability Liability Income Income
2014
2015
2016
2017
2018
[Please show all work.]Question 5 Sales type lease accounting for lessor. The Jazmyn Company frequently purchases equipment from manufacturers. It then leases the equipment to other companies. If Jazmyn is required ]