Maher Has Entered into a Lease Agreement with Johanson Company

Maher has entered into a lease agreement with Johanson Company on January 1, 2014.
1) The lease reverts back to Johanson Company at the end of the lease. Johanson does not offer a bargain purchase option.
2) The term of the lease is 6 years and requires annual payments of $12,000 at the end of the year.
3) The present value of the lease payments is $52,263 using an incremental rate of 10%, the equipment's fair value at lease inception is $62,500.
4) The equipment has an estimated life of asset is 12 years.
Required:
1) Using the four classification criteria determine whether the lease qualifies as an operating or capital lease for Maher.
2) Prepare the journal entries that Maher would make for 2014 and 2015.

Correct Answer:

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