On September 1, 2011, Wong Corporation, which uses private enterprise GAAP, signed a five-year, non-cancellable lease for a machine. The terms of the lease called for Wong to make annual payments of $13,668 at the beginning of each lease year, starting September 1, 2011. The machine has an estimated useful life of six years and a $9,000 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Wong uses the straight-line method of depreciation for all of its plant assets, has a calendar year end, prepares adjusting journal entries at the end of the fiscal year, and does not use reversing entries. Wong’s incremental borrowing rate is 10%, and the lessor’s implicit rate is unknown.
Instructions
(a) Explain why this is a capital lease to Wong.
(b) Using time value of money tables, a financial calculator, or computer spreadsheet functions, calculate the present value of the minimum lease payments for the lessee.
(c) Prepare all necessary journal entries for Wong for this lease, including any year-end adjusting entries through September 1, 2012.
(d) Would this also be a capital lease if the lessee reported under IFRS?