Addison Company Signs a Lease Agreement Dated January 1, 2014

Addison Company signs a lease agreement dated January 1, 2014 for equipment from Luke Rental Company beginning January 1, 2014. The following information relates to the capital lease:
1) The lease term is 5 years, the lease is noncancelable and requires annual payments of $25,000 to be paid in the beginning of each year.
2) The cost and fair value of the equipment is $102,561. The equipment has an estimated life of 5 years and zero residual value.
3) Addison agrees to pay all executory costs.
4) There is no renewal or bargain options
5) Luke's interest rate is implicit to the lease at 11%. Addison is aware of this rate, which is equal to its borrowing rate.
6) Addison uses the straight line method to record depreciation.
7) Executory costs paid at the end of year by Addison are:




*rounded
Required:
Prepare the journal entries for Addison for the years 2014 and 2015.

Correct Answer:

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