On January 1st, 2008, the SAS Company entered into a lease for a high-tech printing press where SAS agreed to make five annual payments of $224,000 beginning December 31st, 2008. They correctly find outd that the PV of the minimum lease payments was $894,000. The lease specified a $1 purchase option so they knew the lessor's implicit rate of 8%. SAS treated this lease as an operating lease, even though they thought that a $1 purchase option was a really good deal!
SAS's auditors did not even look at this lease last year. However, at 12/31/09 its new auditors looked closely, and they told SAS that this should have been recorded as a capital lease, because the purchase option was a bargain.
Prepare the entries that fix this error. SAS normally depreciates assets like printing presses over five years. The 2008 books have long been closed, but the 2009 books are still open.