MANAGEMENT DECISIONS AND FINANCIAL REPORTING LEASCO COMPANY ACCOUNTING FOR LEASES

On January 1, 2008, Leasco (lessee) signed a noncancelable agreement to lease equipment from Rentco (lessor) for 10 year period. Annual payments of $58,588 are due at the end of each year (starting December 31, 2008). Assume both firms use straight-line depreciation.

1. Assume that the lease does not meet any of the four criteria applicable to capital leases. Prepare the lease entries during 2008 and 2009 for Leasco.

2. Assume that ownership of the equipment will be transferred to Leasco on December 31, 2017 (i.e., the end of the lease term) with no required additional payment; however, the equipment is expected to be scrapped at that time at no salvage value. Also, assume Leasco's borrowing rate is 10% on January 1, 2008, thus, the present value of the lease payments is $360,000 at the inception of the lease.

(a) Prepare an amortization schedule for the lease for Leasco.

(b) Prepare the lease entries during 2008 and 2009 (round to the nearest dollar) for Leasco.

3. What general differences are there in net income, assets, liabilities and stockholders' equity between accounting for this lease as an operating versus capital lease during 2008 and 2009 for Leasco? What are total lease expenses over the life of the lease under the operating versus the capital lease methods in this case?