Question;ACC 302 (Intermediate Accounting II), Accounting, Lubin, Pace University, Dr. K. Chung;Quiz #3. Accounting for capital leaseAlpha Industries manufactures equipment that is sold or leased. On December 31, 2013, Alphaleased equipment to Beta Co. for a four-year period ending December 31, 2017, at which timepossession of the leased asset will revert back to Alpha. The equipment cost $600,000 tomanufacture and has an expected useful life of six years. Its normal sales price is $717,860.The expected residual value of $30,000 at December 31, 2017, is not guaranteed. Equalpayments under the lease are $200,000 and are due on December 31 of each year. The firstpayment was made on December 31, 2013. Collectibility of the remaining lease payments isreasonably assured, and Alpha has no material cost uncertainties. Beta?s incremental borrowingrate is 12%. Beta knows the interest rate implicit in the lease payments is 10%. Both companiesuse straight-line depreciation.1. Prepare the appropriate entries for both Beta and Alpha on December 31, 2013.Beta (lessee)Alpha (lessor)2. Prepare an amortization schedules describing the pattern of interest over the lease term forthe lessee and the lessor.Lease Amortization Schedule (Beta)EffectiveDec.3120132013201420152016PaymentsDecrease inOutstandingInterestBalanceBalanceLease Amortization Schedule (Alpha)EffectiveDec.31PaymentsDecrease inOutstandingInterestBalanceBalance2013201320142015201620173. Prepare the appropriate entries for both Beta and Alpha on December 31, 2014 (thesecond lease payment and depreciation).
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