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On 1/1/2014, NH Ice Cream Company signed a non-cancelable lease for an ice cream machine for 10 years. The lease requires NH to pay $160K at each...
1. On 1/1/2014, NH Ice Cream Company signed a non-cancelable lease for an ice cream machine for 10 years. The lease requires NH to pay $160K at each year end for the whole lease term. After 10 years, NH would get the title. The ice cream machine is expected to last 15 years with zero residual value. As for its other machines, NH depreciates its PP&E using the straight-line method. The CFO at NH classified this lease as a capital lease. The PV of lease payments is $1M with 9.0% effective interest rate. What should be the accounting entries that NH record for 2014?
a. lease expense of $160K.
b. interest expense of $66.7K and depreciation expense of $56.7K.
c. interest expense of $90K and depreciation expense of $66.7K.
d. interest expense of $68K and depreciation expense of $100K.
2. Let’s assume Boeing sells its airplane to Delta Airlines and then leases it back for a gain. How should Boeing treat this gain on the sale? a. It should recognize in current year. b.It should recognize it as prior period adjustment. c.It should recognize it when the lease expires. d.It should first defer it and recognize over the lease term as income.
