The board of directors of Swogen Company authorized the president to lease a corporate jet to facilitate her travels to domestic and international subsidiaries of the company. After extensive investigation of the alternatives, the company agreed to lease a jet for $300,548 each year for five years, payable at the end of each year. Title to the jet will pass to Swogen at the end of five years with no further payments required. The lease agreement starts on January 2, 2012. The jet has an economic life of eight years. The lease contract is noncancelable and contains an interest rate of 8%, resulting in a present value of the lease payments of $1,200,000 as of January 2, 2012.
Required:
1. Does this lease contract meet the requirements to be accounted for as a capital lease? Why or why not?
2. Assuming that the lease contract is to be accounted for as a capital lease, prepare the journal entries for Swogen for 2012. Interest included in the first payment is $96,000.