Reference no: EM132872718

Question - Belvedere Industries leased a new forklift on January 1. The lease agreement is for eight years with an annual payment of $4,906 due at the beginning of each year.

Belvedere has the option to buy the forklift at the end of the lease for $5,500, which is the estimated market value at that time. Alternatively, the company may choose to return the forklift with no penalty. At this point, management has not decided whether to buy the asset at the end of the lease.

The forklift will have a useful life of 10 years. 

Belvedere had the opportunity to purchase the forklift from the dealer for $33,856 but chose to lease instead.

The company would have had to borrow from the bank to finance the purchase. The interest rate at that time was 8%. The rate implicit in the lease is 7.6%.Belvedere reports under ASPE.

Required -

a. Determine if this lease should be recorded as an operating lease or Capital/finance Lease from the point of view of the lessee. (Hint: use criteria discussed in chapter/class to test the lease.)

b. Prepare all journal entries: setup of lease, first payment, depreciation, and interest expense for the first year of the lease for lessee.