Thomas Inc. agrees to lease equipment from Smith Inc. for 10 years for $50,000 at the end of the year and $10,000 per year for maintenance. The equipment has a fair value of $ 350,000 and useful life of 10 years. The lease includes a residual value of $20,000. Thomas can finance this lease for at a 12% rate. The lessor's implicit interest rate is 10%. At the end of the first year, Thomas makes a payment of $60,000. How should this payment be recorded?

Debit Obligation under capital lease 50,000
Debit Maintenance expense 10,000
Credit Cash 60,000

Thomas Corporation leases a building from Smith Corporation for 10 years for $50,000 and pay $10,000 for maintenance at the end of each year. The building has a fair value of $350,000 and an estimated life of 25 years. Thomas can finance this lease at a 12% rate. The lessor's implicit rate is 10%. Is the Thomas lease an operating lease because the asset reverts to the lessor or the lease value is less than 90% of the faitr value of the asset?

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Originally Posted by altosal

Thomas Inc. agrees to lease equipment from Smith Inc. for 10 years for $50,000 at the end of the year and $10,000 per year for maintenance. The equipment has a fair value of $ 350,000 and useful life of 10 years. The lease includes a residual value of $20,000. Thomas can finance this lease for at a 12% rate. The lessor's implicit interest rate is 10%. At the end of the first year, Thomas makes a payment of $60,000. How should this payment be recorded?

Debit Obligation under capital lease 50,000
Debit Maintenance expense 10,000
Credit Cash 60,000

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There should be an interest expense and the obligation payment - similar to a mortgage or note payable. They don't necessarily ask about this, but there will also be a depreciation charge for the year.

Debit Obligation under capital lease 18,506
Debit Maintenance expense 10,000
Debit Interest Expense 31,494
Credit Cash 60,000

I'm not quite getting your numbers, but close. If you look at the present value of the lease liability (50,000 for 10 years at 10%), you get $307,250. Interest at 10% of this is 30,725 - with the balance of the 50,000 payment being a debt reduction.