Presented below are three different lease transactions that occurred for Klippert Inc., a private company that prepares its financial statements using ASPE. Assume that all lease contracts start on January 1, 2024. Klippert does not receive title to any of the properties, either during the lease term or at the end of it. Annual lease payments are made at the beginning of each year.  

Instructions 

a. Which of the leases above are operating leases and which are capital leases? Explain. 

b. How should the lease transaction for each of the above assets be recorded on January 1, 2024? 

c. Record the depreciation for each of the leases and accrue any interest on December 31, 2024. (Use the Interest Payable account). 

d. Describe how the lease transaction would be reported on the income statement and balance sheet for each of the above assets for 2024. 

Assume that Klipert has purchased the vehicle for $91,000 instead of leasing it and that the amount borrowed was $91,000 at 7% interest, with interest payable at the end of each year. Prepare the entries for 2024.

Transcribed Image Text:

Annual lease rental payment Lease term Estimated economic life Fair market value of leased asset Present value of lease rental payments Interest rate Manufacturing Equipment $13,260 5 years 15 years $90,540 $61,392 4% Office Equipment $4,092 3 years 6 years $18,760 $11,389 8% Vehicles $13,929 6 years 7 years $91,000 $76,819 3.5%