Assume that on 1-1-2012, Gerber Co entered into a non-cancelable lease agreement to lease a piece of

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Assume that on 1-1-2012, Gerber Co entered into a non-cancelable lease agreement to lease a piece of

Assume that on 1-1-2012, Gerber Co entered into a non-cancelable lease agreement to lease a piece of equipment from Shaw leasing Co with the following terms:Term is 8 years, non-cancelable.The payments are $84,500 per year starting 1-1-2012 for 8 years.The equipment has an estimated economic life of 10 years in total, and the equipment reverts to the lessor after the 8 years with no guaranteed residual value.Gerber’s incremental borrowing rate is 10% and the lessors rate in the lease is unknown.The fair value of the equipment is $539,000 on 1-1-2012.Gerber normally depreciates this type of equipment over 8 years with no residual value.Required:What lease criteria determines the type of lease?Prepare the journal entries for 2012 & 2013

 

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