DL Hughey Co. enters a 7 year lease agreement to lease equipment for its factory. The terms of the lease as lessee records a capital lease of machinery on January 1, 2013. Seven annual lease payments of $425,000 are made at the start of each year, including inception of the lease. There is a guaranteed residual value of $25,000 at the end of the lease when the property is returned to the lessor, GF Cap Leasing. The useful life of the equipment is 8 years. GF Cap Leasing's implicit rate is 10% and DL Hughey's incremental borrowing rate is 12%. The fair market value of the equipment $2,550,000 at the inception of the lease.
DL Hughey uses the effective-interest method of amortization and straight-line depreciation :
Instructions (Round to the nearest dollar.)
(a) What type of lease is this for DL Hughley and why?
(b) Prepare an amortization table for the life of the lease.
(c) Prepare all of DL Hughey's journal entries for 2013 and 2014.