Thus, the lease payments are recorded as a liability of Grichuk Power and as an asset of Kolten Leasing.
Given Information:Grichuk Power leased high-tech electronic equipment from Kolten Leasing on January 1, 2018. Kolten purchased the equipment from Wong Machines at a cost of \( \$ 254,000 \), its fair value. (FV of \$1,000,000 at January 1, 2018)Solution:The lease transaction between Grichuk Power and Kolten Leasing is called a capital lease because the present value of the lease payments, discounted at Grichuk Power's incremental borrowing rate, is equal to or greater than 90% of the fair value of the leased equipment.
The lease payments are due on January 1 of each year.
The lease term is for six years, with no renewal option. Grichuk Power assumes all risks of loss or damage to the leased equipment as well as any residual value.
On January 1, 2018, Kolten Leasing has leased equipment with a fair value of $ 1,000,000 and cost of $ 254,000 from Wong Machines.
The lease agreement between Grichuk Power and Kolten Leasing is considered a capital lease because the present value of the lease payments, discounted at Grichuk Power's incremental borrowing rate, is equal to or greater than 90% of the fair value of the leased equipment.
Thus, the lease payments are recorded as a liability of Grichuk Power and as an asset of Kolten Leasing.
The lease payments are made on January 1 of each year. Grichuk Power assumes all risks of loss or damage to the leased equipment as well as any residual value.Entry in the books of Grichuk Power:DateAccountsTitleDebitCreditJan 1, 2018Leased Equipment under Capital Lease1,000,000Lease Liability1,000,000(To record leased equipment under capital lease)Thus, the entry to be made by Grichuk Power on January 1, 2018, to record the leased equipment under the capital lease is $1,000,000.
Therefore, the correct option is (a) $ 1,000,000.