Question

Question: (Lessee Entries and Balance Sheet Presentation, Capital Lease) On January 1, 2017, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of \(137,899 (including the executory costs of \)6,000) at the beginning of each year, starting January 1, 2017. The taxes, the insurance, and the maintenance, estimated at \(6,000 a year, are the obligations of the lessee. The leased equipment is to be capitalized at \)550,000. The asset is to be depreciated on a double-declining-balance basis, and the obligation is to be reduced on an effective-interest basis. Cage’s incremental borrowing rate is 12%, and the implicit rate in the lease is 10%, which is known by Cage. Title to the equipment transfers to Cage when the lease expires. The asset has an estimated useful life of 5 years and no residual value.

Instructions

(c) Prepare the journal entry to record depreciation of the leased asset for the year 2017.

Short answer

Accumulated depreciation is$220,000.

Step-by-step solution

Meaning of Depreciation

Depreciation is a reduction in the price of a tangible assetthat affects the asset's monetary worth owing to a range of factors such as wear and tear from extended usage.

Preparing journal entries

Date	Particular	Debit ($)	Credit ($)
	Depreciation Expense	220,000
	Accumulated Depreciation Capital Leases		220,000

Working Notes:

Calculation of accumulated depreciation-capital lease

$$\begin{gathered} \text{Accumulated}\text{depreciation}=\text{Equipment}\text{cost}\times \text{total borrowing} \text{rate} \\ =\$550,000\times 40\% \\ =\$550,000\times \frac{40}{100} \\ =\$220,000 \end{gathered}$$