ACC 302 (Intermediate Accounting II) Quiz
ACC 302 (Intermediate Accounting II), Accounting, Lubin, Pace University, Dr. K. Chung
Quiz #3. Accounting for capital lease
Alpha Industries manufactures equipment that is sold or leased. On December 31, 2013, Alpha
leased equipment to Beta Co. for a four-year period ending December 31, 2017, at which time
possession of the leased asset will revert back to Alpha. The equipment cost $600,000 to
manufacture and has an expected useful life of six years. Its normal sales price is $717,860.
The expected residual value of $30,000 at December 31, 2017, is not guaranteed. Equal
payments under the lease are $200,000 and are due on December 31 of each year. The first
payment was made on December 31, 2013. Collectibility of the remaining lease payments is
reasonably assured, and Alpha has no material cost uncertainties. Betaâ€™s incremental borrowing
rate is 12%. Beta knows the interest rate implicit in the lease payments is 10%. Both companies
use straight-line depreciation.
1. Prepare the appropriate entries for both Beta and Alpha on December 31, 2013.
2. Prepare an amortization schedules describing the pattern of interest over the lease term for
the lessee and the lessor.
Lease Amortization Schedule (Beta)
Lease Amortization Schedule (Alpha)
3. Prepare the appropriate entries for both Beta and Alpha on December 31, 2014 (the
second lease payment and depreciation).