Extractor Company leased a machine on July 1, 2013, under a 10-year lease. The economic life of the machine is estimated to be 15 years. Title to the machine passes to Extractor Company at the expiration of the lease, and thus, the lease is a capital lease.
The lease payments total $194,000 per year (which includes executory costs of $6,000 per year), all payable in advance annually. The incremental borrowing rate of the company is 9%, and the lessor's implicit interest rate is unknown. Extractor Company uses the straight-line method of amortization and the calendar year for reporting purposes.
Instructions:
1. Give all entries on the books of the lessee relating to the lease for 2013.
2. Assume that the lessor retains title to the machine at the expiration of the lease, that there is no bargain renewal or purchase option, and that the fair value of the equipment is $1,420,000 as of the lease date. Using the criteria for distinguishing between operating and capital leases according to FASB ASC Topic 840, what would be the amortization expense for 2013?