On January 1, 2014, Q-Mart entered into a five-year lease agreement requiring annual payments of $10,000 on
Question:
On January 1, 2014, Q-Mart entered into a five-year lease agreement requiring annual payments of $10,000 on December 31 of each year. The fair market value of the facility was estimated by appraisers to be $39,927.
a. Record the journal entries required over the five-year period, assuming that Q-Mart accounts for this arrangement as an operating lease.
b. Compute the effective interest rate on the lease, and record the journal entries required over the five-year period if Q-Mart accounts for this arrangement as a capital lease. Assume that the capitalized asset is depreciated over a five-year period, using the straight-line method with no salvage value.
c. Compare the effects of the two accounting methods on the financial statements. Discuss.
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Step by Step Answer:
a Lease Expense E SE 10000 Cash A 10000 Incurred and paid lease expense for 2014 Lease Expense E SE 10000 Cash A 10000 Incurred and paid lease expense for 2015 Lease Expense E SE 10000 Cash A 10000 In...View the full answer
