Acme Enterprises leased equipment from Monument Equipment Co. on January 1, 2011. The terms of the lease agreement require five annual payments of $20,000 with the first payment being made on January 1, 2011, and each subsequent payment being made on December 31 of each year. Because the equipment has an expected useful life of five years, the lease qualifies as a capital lease for Acme. Acme does not know Monument’s implicit interest rate and therefore uses its own incremental borrowing rate of 12% to calculate the present value of the lease payments. Acme uses the sum-of-the-years’-digits method for amortizing leased assets. The expected salvage value of the leased asset is $0.
1. Prepare a schedule that shows the lease obligation balance in each year of the lease.
2. Prepare an asset amortization schedule for the leased asset.
3. Compare the amount shown on the year-end balance sheet for the leased asset with that of the lease obligation for the years 2011 through 2015 and explain why the amounts differ.
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