Maher Has Entered into a Lease Agreement with Johanson Company

question 75

Essay

Maher has entered into a lease agreement with Johanson Company on January 1, 2014.
1) The lease reverts back to Johanson Company at the end of the lease. Johanson does not offer a bargain purchase option.
2) The term of the lease is 6 years and requires annual payments of $12,000 at the end of the year.
3) The present value of the lease payments is $52,263 using an incremental rate of 10%, the equipment's fair value at lease inception is $62,500.
4) The equipment has an estimated life of asset is 12 years.
Required:
1) Using the four classification criteria determine whether the lease qualifies as an operating or capital lease for Maher.
2) Prepare the journal entries that Maher would make for 2014 and 2015.

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Definitions:

Fee Simple

A type of freehold ownership where the owner has the maximum possible rights to the land or property, under the law, including the right to sell or inherit it.

Inherited

Pertains to assets, traits, or conditions passed down from parents to their offspring through genes or legal processes.

Judgment Creditors

Individuals or entities awarded a monetary judgment against a debtor in court.

Life Estate

A legal arrangement whereby a person (life tenant) has the right to use, occupy, and benefit from a property during their lifetime, but cannot sell it, and upon their death, it passes to a remainderman.