Noncancelable lease agreement

P21-4 The following facts pertain to a noncancelable lease agreement between Alschuler Leasing Company and McKee Electronics, a lessee, for a computer system. Inception date: October 1, 2014 Lease term: 6 years Economic life of lease equipment: 6 years Fair value of asset at October 1, 2014: $300,383 Residual value at end of lease term: 0 Lessor’s implicit rate: 10% Lessee’s incremental borrowing rate: 10% Annual lease payment due at the beginning of each year, beginning with October 1, 2014: $62,700 The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs, which amount to $5,500 per year, and are paid each October 1, beginning October 1, 2014. (This $5,500 is not included in the rental payment of $62,700.) The asset will revert to the lessor at the end of the lease term. The straight-line depreciation method is used for all equipment. The following amortization schedule has been prepared correctly for use by both the lessor and the lessee in accounting for this lease. The lease is to be accounted for properly as a capital lease by the lessee and as a direct-finance lease by the lessor. Date: Annual lease Payment / Receipt: Interest (10%) on Unpaid Liabililty / Receivable: Reduction of Lease Liability / Receivable: Balance of Lease Liability / Receivable:1 0/01/14 300,383 10/01/14 62,700 62,700 237,683 10/01/15 62,700 23,768 38,932 198,751 10/01/16 62,700 19,875 42,825 155,926 10/01/17 62,700 15,593 47,107 108,819 10/01/18 62,700 10,882 51,818 57,001 10/01/19 62,700 5,699 57,001 0376,200 75,817 300,383 *Rounding error is $1 at 10/01/19 for Interest on Unpaid Liability/Receivable. Instructions: (Round to whole dollars.)  (a) Assuming the lessee’s accounting period ends on September 30, answer the following questions with respect to this lease agreement: (1) What items and amounts will appear on the lessee’s income statement for the year ending September 30, 2015? (2) What items and amounts will appear on the lessee’s balance sheet at September 30, 2015? (3) What items and amounts will appear on the lessee’s income statement for the year ending September 30, 2016? (4) What items and amounts will appear on the lessee’s balance sheet at September 30, 2016? (b) Assuming the lessee’s accounting period ends on December 31, answer the following questions with respect to this lease agreement: (1) What items and amounts will appear on the lessee’s income statement for the year ending December 31, 2014? (2) What items and amounts will appear on the lessee’s balance sheet at December 31, 2014? (3) What items and amounts will appear on the lessee’s income statement for the year ending December 31, 2015? (4) What items and amounts will appear on the lessee’s balance sheet at December 31, 2015?

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