On January 1, 2014, Task Co. signs an agreement to lease office equipment from Coleman Inc. for three years with payments of $193,357 beginning December 31, 2014. The equipment’s fair value is $500,000 with an expected useful life of four years. At the end of three years, the equipment is expected to have a $50,000 residual value, which Task does not guarantee. Both Task and Coleman use a 12% rate of return in evaluating this transaction. Task uses straight-line depreciation.
1. What type of a lease is this for Task and why?
2. Prepare a schedule to amortize the lease liability. Round the amount of the initial lease liability to the nearest dollar and all amounts in the schedule to the nearest cent.
3. Prepare the journal entries required on Task’s books for 2014 and 2016.
4. Assume now that Task guarantees the residual value. Prepare an amortization table and the journal entries necessary on Task’s books for 2014 and 2016. Further assume that the equipment’s residual value on December 31, 2016, is $40,000.
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