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, 2021. 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 on January 1 of each year starting on January 1, 2021.

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, 2021?

c. Describe how the lease transaction would be reported on the income statement and balance sheet for each of the above assets for 2021.

Taking It Further

For each of the leases, prepare any required adjusting journal entries on December 31, 2021. Assume that Klippert Inc. would pay 7% interest if it borrowed cash and purchased the assets instead of leasing them.

Transcribed Image Text:

Office Equipment $4,092 3 years 6 years Manufacturing Equipment Vehicles Annual lease rental payment Lease term Estimated economic life Fair market value of leased asset Present value of lease rental payments $13,260 5 years 15 years $13,929 6 years 7 years $90,540 $18,760 $91,000 $75,379 $54,690 $10,040