Titan Ltd. entered into an agreement to lease manufacturing equipment. The following terms are included in the lease:
• Payments required semi-annually on June 30 and December 31: $9,327 each
• Estimated useful life of equipment: 15 years
• Lease term: 10 years
At the end of the lease term, Titan has the option to acquire the equipment for $10,000.
The terms of the lease reflect an annual interest rate of 10%. The lease started January 1, 2011.
At that time, the equipment could have been purchased for $120,000.
Required:
a. Is the above lease a finance lease or an operating lease? Explain why, referring to the criteria for classifying leases.
b. Assuming that Titan records the lease as a finance lease, calculate the present value of the lease payments. (Hint: Include the present value of the $10,000 purchase option to be paid at the end of 10 years.)
c. Give the journal entry that should be made to record the inception of the lease on January 1, 2011.
d. Should Titan depreciate the equipment over 10 years or over 15 years? Explain.
e. Assuming that Titan uses straight-line depreciation, give the journal entry that should be made to record depreciation on December 31, 2011.
f. Give the journal entries that should be made to record the lease payments made on June 30 and December 31, 2011.
g. What amounts related to the lease would appear on Titan's December 31, 2011, statement of financial position?