South Texas Frackers has an incremental borrowing rate of 5%. South Texas Frackers is considering the...

 

Transcribed Image Text:

South Texas Frackers has an incremental borrowing rate of 5%. South Texas Frackers is considering the following lease to acquire a standard drill with fair value of $87,500 over 4 years. The lease will be signed on 1 January 2017 and payments are due at the end of each period. Other characteristics for each lease considered are: Lease Payments 18,000.00 Expected Residual Value |(Unguaranteed) Economic Life of Asset 15,000.00 8 years Will this lease be classified as a finance lease or as an operating lease? Clearly identify each of the 5 classification tests. CLEARLY state your conclusion. Prepare South Texas Frackers' journal entries for the first two years. South Texas Frackers has an incremental borrowing rate of 5%. South Texas Frackers is considering the following lease to acquire a standard drill with fair value of $87,500 over 4 years. The lease will be signed on 1 January 2017 and payments are due at the end of each period. Other characteristics for each lease considered are: Lease Payments 18,000.00 Expected Residual Value |(Unguaranteed) Economic Life of Asset 15,000.00 8 years Will this lease be classified as a finance lease or as an operating lease? Clearly identify each of the 5 classification tests. CLEARLY state your conclusion. Prepare South Texas Frackers' journal entries for the first two years.

Answer rating: 100% (QA)

31Dec17 Lease Liability 18000 Bank 18000 Lease Liabilit... View the full answer