91Ó°ÊÓ

Brecker Company leases an automobile with a fair value of \(10,906 from Emporia Motors, Inc., on the following terms:

1. Non-cancelable term of 50 months.
2. Rental of \)250 per month (at end of each month). (The present value at 1% per month is \(9,800.)
3. Estimated residual value after 50 months is \)1,180. (The present value at 1% per month is \(715.) Brecker Company guarantees the residual value of \)1,180.
4. Estimated economic life of the automobile is 60 months.
5. Brecker Company’s incremental borrowing rate is 12% a year (1% a month). It is impracticable to determine Emporia’s implicit rate.

Instructions

(d) Record the first month’s depreciation on Brecker Company’s books (assume straight-line).

Step by step solution

01

Meaning of Depreciation Expense

The proportion of a company's fixed asset cost that is depreciated over the accounting periodreflected in the income statement's heading is referred to as depreciation expense.

02

Preparing journal entry

Date	Particular	Debit ($)	Credit ($)
	Depreciation Expense	187
	Accumulated Depreciation Capital Leases		187

Working Notes:

Calculation of Accumulated depreciation–capital leases

$\begin{array}{rcl}\text{Accumulated}\text{depreciation}& =& \frac{\text{Leased}\text{equipment}-\text{Residual}\text{value}}{\text{Estimated}\text{life}}\\ & =& \frac{\$10,515-\$1,180}{50}\\ & =& \$187\end{array}$

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