Raines Corporation Entered into a Five-Year Lease for a Computer

question 39

Essay

Raines Corporation entered into a five-year lease for a computer on January 1, Year 3.The lease requires Raines to make equal payments of $20,000 on January 1 each year for the five years of the lease, with the first payment made on January 1, Year 3.Raines' borrowing rate is 10 percent.Raines uses the straight-line depreciation method for financial reporting.It estimates a zero salvage value.The accounting period is the calendar year.Round amounts to the nearest dollar.
Required:
a. Give the journal entries that Raines would make during Year 3 if this lease were considered an operating lease for financial reporting.
b. Repeat [a] but assume the lease is a capital lease for financial reporting.
c. Assume that this lease is considered a capital lease for financial reporting. Calculate depreciation expense for financial reporting purposes for Year 3 and Year 4.
d. Compute the total expenses (ignore income taxes) that Raines would recognize over the 5-year term of the lease, assuming it is an operating lease.
e. Repeat [d] but assume the lease is a capital lease.

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Definitions:

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