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Operating lease.Maris Co. purchased a machine on January 1, 2011, for $1,000,000 for the express purpose of leasing it. The machine is expected to have a five-year life, no salvage value, and be depreciated on a straight-line monthly basis. On April 1, 2011, under a cancelable lease, Maris leased the machine to Dunbar Company for $300,000 a year for a four-year period ending March 31, 2015. Maris incurred total maintenance and other related costs under the provisions of the lease of $15,000 relating to the year ended December 31, 2011. Dunbar paid $300,000 to Maris on April 1, 2011.Instructions [Assume the operating method is appropriate for parts (a) and (b).](a)Under the operating method, what should be the income before income taxes derived by Maris Co. from this lease for the year ended December 31, 2011?(b) What should be the amount of rent expense incurred by Dunbar from this lease for the year ended December 31, 2011?Changes in depreciation methods, estimates.On January 1, 2006, Powell Company purchased a building and machinery that have the following useful lives, salvage value, and costs.Building, 25-year estimated useful life, $4,000,000 cost, $400,000 salvage valueMachinery, 10-year estimated useful life, $500,000 cost, no salvage valueThe building has been depreciated under the straight-line method through 2010. In 2011, the company decided to switch to the double-declining balance method of depreciation for the building. Powell also decided to change the total useful life of the machinery to 8 years, with a salvage value of $25,000 at the end of that time. The machinery is depreciated using the straight-line method.Instructions(a) Prepare the journal entry necessary to record the depreciation expense on the building in 2011.(b) Compute depreciation expense on the machinery for 2011.Lessee accounting—capital lease.Eubank Company, as lessee, enters into a lease agreement on July 1, 2010, for equipment. The following data are relevant to the lease agreement:1.The term of the noncancelable lease is 4 years, with no renewal option. Payments of $422,689 are due on June 30 of each year.2.The fair value of the equipment on July 1, 2010 is $1,400,000. The equipment has an economic life of 6 years with no salvage value.3.Eubank depreciates similar machinery it owns on the sum-of-the-years’-digits basis.4.The lessee pays all executory costs.5. Eubank’s incremental borrowing rate is 10% per year. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease payments (present value factor for 4 periods at 8%, 3.31213; at 10%, 3.16986.Instructions(a) Indicate the type of lease Eubank Company has entered into and what accounting treatment is applicable.(b)Prepare the journal entries on Eubank’s books that relate to the lease agreement for the following dates: (Round all amounts to the nearest dollar. Include a partial amortization schedule.)1.July 1, 2010.2.December 31, 2010.3.June 30, 2011.4.December 31, 2011.
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