Crest Industries
Crest Industries Leased Store Furnishings from Santa Fe

question 84

Essay

Crest Industries
Crest Industries leased store furnishings from Santa Fe Leasing on January 1 of the current year. Santa Fe had purchased the furnishings from Steelman Enterprises for $700,000.
Other information:
$$\begin{array} { | l | l | } \hline \text { Lease term } & 5 \text { years } \\\hline \text { Quarterly Payments } & \$ 45,681 \text { at the beginning of each quarter } \\\hline \text { Life of Asset } & 5 \text { years } \\\hline \text { Fair value of Asset } & \$ 700,000 \\\hline \text { Implicit annual interest rate } & 12 \% \\\hline \text { Incremental rate } & 12 \% \\\hline\end{array}$$
There is no expected residual value or bargain purchase option. Assume that depreciation expense is computed at December 31 of each year.
-Refer to Crest Industries:
1. Prepare an amortization schedule for the first year of the lease.
2. Prepare the appropriate journal entries for Crest for the first two payments of the current year and depreciation expense for December 31 of the current year.
3. Show how the lease-related information will be presented on Crest's financial statements at December 31 of the current year.

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Definitions:

FIFO Method

An inventory valuation method where the first items acquired are the first ones sold or used, standing for First In, First Out.

Average Cost Method

An inventory costing method where the cost of goods sold and ending inventory values are determined by averaging the costs of all items available for sale during the period.

Average Costing

An inventory costing method where all units are valued at the average cost of all similar items in the inventory.

Process Costing

An accounting methodology that traces and accumulates direct costs, and allocates indirect costs of a manufacturing process, then assigns them to products.