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Extractor Company leased a machine on July 1, 2011, under a 10-year lease. The economic life of the machine is estimated to be 15 years.
Extractor Company leased a machine on July 1, 2011, under a 10-year lease. The economic life of themachine is estimated to be 15 years. Title to the machine passes to Extractor Company at theexpiration of the lease, and thus, the lease is a capital lease. The lease payments are $97,000 per year,including executory costs of $3,000 per year, all payable in advance annually. The incrementalborrowing rate of the company is 9%, and the lessor's implicit interest rate is unknown. ExtractorCompany uses the straight-line method of amortization and the calender year for reporting purposes.Instructions:1. Give all entries on the books of the lessee relating to the lease for 2011.2. Assume that the lessor retains title to the machine at the expiration of the lease, that there is notbargain renewal or purchase option, and that the fair value of the equipment is $710,000 as ofthe lease date. Using the criteria for distinguishing between operating and capital leasesaccording to FASB Statement No. 13, what would be the amortization expense for 2011?
