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

(f) What amounts will appear on the lessee’s December 31, 2017, balance sheet relative to the lease contract?

Short answer

The total value of the asset on the balance sheet is $330,000

Step-by-step solution

Meaning of balance sheet

A balance sheet determines acompany's financial position by showing its total assets and total liabilities. It is a very effective tool that is used by a shareholder to invest in the company.

Preparing balance sheet

CAGE COMPANY Balance Sheet (Partial) December 31, 2017
Assets		Liabilities
Property, plant, and equipment:		Interest payable Lease liability	$ 41,810 90,089
Leased Equipment	$550,000	Noncurrent:
Less: Accumulated depreciation capital leases	220,000	Lease liability	328,012
	$330,000