On January 1 2011 Cage Company contracts to lease

equipment
On January 1, 2011, Cage Company contracts to lease equipment for 5 years, agreeing to
make a payment of $137,899 (including the executory costs of $6,000) at the beginning of each
year, starting January 1, 2011. The taxes, the insurance, and the maintenance, estimated at
$6,000 a year, are the obligations of the lessee. The leased equipment is to be capitalized at
$550,000. The asset is to be depreciated on a double-declining-balance basis, and the
obligation is to be reduced on an effective-interest basis. Cage’s incremental borrowing rate is
12%, and the implicit rate in the lease is 10%, which is known by Cage. Title to the equipment
transfers to Cage when the lease expires, the asset has an estimated useful life of 5 years and
no residual value. Instructions (Round all numbers to the nearest dollar.)(a) Explain the
probable relationship of the $550,000 amount to the lease arrangement.(b) Prepare the journal
entry or entries that should be recorded on January 1, 2011, by Cage Company.(c) Prepare the
journal entry to record depreciation of the leased asset for the year 2011.(d) Prepare the journal
entry to record the interest expense for the year 2011.(e) Prepare the journal entry to record the
lease payment of January 1, 2012, assuming reversing entries are not made.(f) What amounts
will appear on the lessee’s December 31, 2011, balance sheet relative to the lease
contract?View Solution:
On January 1 2011 Cage Company contracts to lease equipment
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