Monk Company, a dealer in machinery and equipment, leased equipment with a 10-year life to Leland Inc.

Question:

Monk Company, a in machinery and equipment, leased equipment with a 10-year life to Leland Inc. on July 1, 2014. The lease is appropriately accounted for as a sale by Monk and as a purchase by Leland. The lease is for an eight-year period, expiring June 30, 2022. The first of eight equal payments of $300,000 is due on June 30, 2015. Leland has an option to purchase the equipment on June 30, 2022, for $100,000 even though the expected residual value at that time is $600,000. Leland’s incremental borrowing rate is 7%, and it uses straight-line depreciation. The equipment is expected to have a of zero at June 30, 2024.

Required:
1. At what amount should Leland record the leased equipment on July 1, 2014?
2. Prepare Leland’s amortization table for the leased equipment.
3. What is the amount of depreciation and interest expense that Leland should record for the year ended December 31, 2014, and for the year ended December 31, 2015?

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