IBM manufactures a particular computer for $6,000 and sells it for $10,000. Adair Corporation needs this computer in its operations and contemplates three ways of acquiring it on January 1, 2008. The computer has a three-year estimated useful life and zero salvage value. Both firms use the straight-line depreciation method.
1) Outright Purchase: Adair Corporation will borrow $10,000 from its bank and purchase the computer from IBM. The bank loan bears interest at 8% annually and requires payments of $3,880, which includes principal and interest, on December 31 of 2008, 2009, and 2010.
2) Operating Lease: Adair Corporation will lease the computer from IBM and account for it as an operating lease. IBM sets the annual payment due on December 31, 2008, 2009, and 2010 at $3,810.
3) Capital Lease: Adair Corporation will lease the computer from IBM and account for it as a capital lease, using an annual interest rate of 7%. The annual payment due on December 31 of 2008, 2009, and 2010 is $3,810.
Give the journal entries on the books of Adair Corporation on January 1, 2008, December 31, 2008, and December 31, 2009, related to the loan and acquisition of the equipment assuming the outright purchase alternative.
Depreciation is a decline in the value of fixed assets due to the passage of time, accident, wear or tear, etc. This concept is applicable only to tangible assets. It is an expense debited to a profit or loss account while calculating the profit or loss for the current year.
Answer and Explanation: 1
Journal Entries to be passed are as follows:
|Date||Particulars||Amount (Dr)||Amount (Cr)|
|January 1, 2008||Cash||$10,000|
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fromChapter 5 / Lesson 4
Operating leases allow businesses to use assets without purchasing them. Learn about the impact of operating leases on financial statements. Review the start of the lease, accounting for a lease, and the year-end entry of a lease in accounting books.