Accounting Problem 3

 (CREDIT):

--written by thewirter197
--employed by Ashford University



 --------------------------------------PROBLEMS-----------------------------------------------------------------

Develop two lease examples, operating and capital which includes the lease terms. State the requirements for determining whether a lease is an operating or capital lease. Provide journal entries that set up the lease and entries for payments. Show how the lease would be disclosed, if required on the balance sheet. State the reasons why you classified the lease as operating or capital.




-------------------------------------------ANSWER-----------------------------------------------------------------


(Operating Lease):
On Feb. 23 2007, Clank and Bots made a 2-year leased. The lease was for a 18-Wheeker truck. The life of the truck is expected to last 8 years. The truck has a value of $12,000. The end of year rental payment for year 1 was $3,000. The end of year rental payment for year 2 was $3,500. Maintenance fees for year 1 was $1700. Maintenance fees for year 2 was $1100. After a couple years, Clank and Bots brought the truck back and paid for additional truck maintenance.



Year 1, Feb. 23 2007:
                  Rental Expense:                                3,000
                  Additional Maintenance Fees:         1, 700
                  Check from Clank and Bots:                             4,700

Year 2, Feb. 23 2008:
                  Rental Expense:                                3,500
                  Additional Maintenance Fees:          1,100
                  Check from Clank and Bots:                           4,600



(Capital Lease):

On March 31 2001, Mr. Tim Smith purchased a condo from Light Ocean Apartments. He made a payment of $200 for security deposit. He also Deposited $700 for first month rent and utilities for the next 5 years to March 31 2006. (700X5=$3,500).



Year 1 March 31 2001:
                             Security Deposit:    200
                             Rent:                       700
                             Smith Check:                    900
Year 2 March 31 2002:
                              Rent:                      700
                              Smith Check:                   700
Year 2 March 31 2003:
                              Rent:                      700
                              Smith Check:                   700
Year 2 March 31 2004:
                              Rent:                      700
                              Smith Check:                   700
Year 2 March 31 2005:
                              Rent:                      700
                              Smith Check:                   700
Year 2 March 31 2006:
                              Rent:                      700
                              Smith Check:                   700





1. Why operating? Operating related to things you lease for work purposes.
2. Why capital? Capital is funds that are used to support a project or business. Things you buy month to month like food or rent. Things you buy for survival and luxury expenses.