Question:

Lessee Accounting with Payments Made at starting of Year

Adden Company starts a lease agreement dated January 1, 2013, that gives for it to lease heavy equipment from Scott Rental Company January 1, 2013. The lease terms, provisions, and related events are as given:

1. The lease term is 4 years. The lease is noncancelabe and needs annual rental payments of $20,000 each to be paid in advance at the starting of the year.
2. The cost, and also fair value, of the heavy equipment to Scott at the inception of the lease is $68,036.62. The equipment has an estimated life of 4 years and has a zero evaluate residual value at the end of this time.
3. Adden agrees to pay all executory costs.
4. The lease has no renewal or bargain purchase option.
5. Scott's interest rate implicit in the lease is 12%. Adden is aware of this rate, which is equal to its borrowing rate.
6. Adden uses the straight line method to record depreciation on similar equipment.
7. Executory costs paid at the end of the year by Adden are:

                                 2013                                                                    2014
                 Insurance, $1,500                                                           Insurance, $1,300
                 Property Taxes, $6,000                                                  Property Taxes, $5,500

1. Examine and determine each capitalization creiteria and evaluate what type of lease this is for Adden.
2. Prepare a table summarizing the lerase payments and interest expense for Adden.
3. Prepare journal entries for Adden for the years 2013 and 2014.