The document discusses capitalizing a lease for a 2005 Shirk automobile. It was previously treated as an operating lease and expensed to rent. However, the lease term of 4 years is greater than 75% of the asset's useful life of 5 years, so it qualifies as a capital lease under accounting rules. The journal entries to capitalize the lease include debiting Leased Asset Under Capital Leases for $7,963 and crediting Lease Liability. Annual depreciation of $1,716 is then recorded along with rent and interest expense entries over the lease term.

1. David Schneck<br />Writing Assignment 2<br />Professor Stephans<br />SARAH SHAMESS, INC.<br />December 31, 2006<br />Capital Lease<br />A 2005 Shirk automobile which wasn’t listed among the company’s assets in the equipment section. Sally Straub stated that because the Shirk was only being leased, it was not listed along with other assets. Because of this Sarah Shamess, Inc. had charged $2,160 to 2006 rent expense. I determined that the Shirk should be capitalized because its lease term of 4 years is greater than 75% of its useful life of 5 years. Capitalize this lease at the present value of its minimum lease payments: $7,154 which is the present value of the monthly payments, plus $809 which is the present value of the guaranteed residual value. Finally, the Shirk must be depreciated over its lease term using the straight-line method, I computed annual depreciation of $1,716 the capitalized amount. The following are journal entries that needed to be made for the company<br />Leased Asset Under Capital Leases7,963<br />Lease Liability7,963<br />Lease Liability1,523<br />Interest Expense 637<br />Rent Expense2,160<br />Depreciation Expense1,716<br />Accumulated Depreciation1,716<br />