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Problem 9 Lessee - No Guaranteed Residual Value Z Company...

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Accounting

Problem 9 Lessee - No Guaranteed Residual Value
Z Company enters into a lease agreement with F Co. on Jan 1,1996, to lease a machine to be used in its
manufacturing operations. The following data pertain to this agreement.
a. The term of the noncancelable lease is 3 years, with no residual value at the end of the lease term.
Payments of $102,356.39 are due on Dec. 31 of each year. The first payment in advance is paid on Jan. 1,1996.
b. The fair value of the machine on Jan 1,1996 is $300,000. The machine has an economic life of 5 years, with no
salvage value. The machine reverts to the lessor upon the termination of the lease.
c.Z and F company use the straight-line method to depreciate equipment.
d. Z's incremental borrowing rate is 10% and the implicit rate is unknown.
Required:
Is this a capital lease or operating lease. Why?
Instructions: Prepare journal entries on the books of the lessee through the Life of the lease ..
The accounting period of Z and F Company ends on December 31.
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