Entries for Lease—Lessee
On January 2, 2008, Jacques Company entered into a no cancelable lease for new equipment. The equipment was built to Jacques Company’s specifications and is in an area in which rental to another lessee would be difficult. Rental payments are $300,000 a year for 10 years, payable in advance. The equipment has an estimated economic life of 20 years. The taxes, maintenance, and insurance are to be paid directly by Jacques Company, and the title to the equipment is to be transferred to Jacques at the end of the lease term. Assume the cost of borrowing funds for this type of an asset by Jacques Company is 12%.
1. Give the entry on Jacques’ books that should be made at the inception of the lease.
2. Give the entries for 2008 and 2009, assuming the second payment and subsequent payments are made on December 31 and assuming double declining balance amortization.