On July 1, 2014, Burgundy Studios leases camera equipment from Corningstone Corporation.
The lease covers eight years and requires lease payments of $42,000, beginning on July 1, 2014. The unguaranteed residual value is $90,000. On July 1, 2014, the equipment has a fair value of $278,966 and an estimated life of 10 years. The implicit rate in the lease is 11%.
Burgundy’s fiscal year ends on June 30, and the company depreciates its other equipment on a straight-line basis.

Part A
1. Show why this is a capital lease for Burgundy Studios.
2. Prepare an amortization table for the lease.
3. Prepare Burgundy’s journal entries from the inception of the lease through June 30, 2015.
Be sure to make any necessary reclassifications to current liabilities at the end of each reporting period.
Part B
Assume that Burgundy’s reporting year ends on December 31 instead of June 30.
1. Prepare the entries to be made on December 31, 2014, July 1, 2015, and December 31, 2015.
2. Compute and label the amounts to be shown on the balance sheet and income statement for the years ended December 31, 2014, and December 31, 2015.
3. Show how the income statement and balance sheet would differ for 2014 and 2015 if the lease were treated as an operating lease.

  • CreatedSeptember 10, 2014
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