On January 1, 2010, Remy Corp., a lessee, signed a five-year capital lease for new equipment.The lease requires annual payments of $8, 000.The first payment is due on December 31, 2010.Remy guaranteed a residual value of $2, 000.On December 31, 2014, Remy returned the asset to the lessor, and the asset was appraised at a value of $1, 500.Remy should record which of the following on December 31, 2014?
A)a $1, 500 credit to leased equipment
B)a $ 500 debit to a loss account
C)a $ 500 debit to cash
D)a $1, 500 credit to cash

Question

Quizplus · Accepted Answer

The guaranteed residual value was $2,000 but the actual residual value at the end of the lease term was only $1,500, indicating that the asset has depreciated more than expected. Therefore, Remy should record a loss on the disposal of the leased asset, which will be equal to the difference between the guaranteed residual value and the actual residual value, i.e. $2,000 - $1,500 = $500. This loss should be debited to a loss account.