Seal Container Corporation () signed a lease agreement on January 1, 2016, to lease new forklift equipment. The terms of the lease are presented below:
• The non-cancellable lease has a term of 10 years. There are no purchase or renewal options.
• SCC makes the annual lease payments of $ 70,000 at the beginning of each year.
• The fair value of the equipment at the inception of the lease is $ 567,548.
• The equipment has an economic life of 15 years.
• The lease terms do not include a guaranteed residual value clause.
• The cost of the equipment to the lessor, Cirella Manufacturing Company, is $ 500,000.
• SCC depreciates the forklifts it currently owns on a straight- line basis over the economic life of the property.
• SCC’s incremental borrowing rate is 5% and the lessor’s 6% implicit rate in the lease is known to SCC.
• The lessee pays executory costs related to this lease of $ 1,000 per year on December 31 of each year. The lessee classifies these payments as general and administrative expenses.
• There are no material uncertainties as to collection of the lease payments or future costs to be incurred under the lease.
Required
a. Classify this lease as operating or capital for the lessee.
b. Prepare an amortization table for the lessee from 2016 through 2018 using the effective interest rate method of amortization.
c. Prepare all of SCC’s journal entries for the first full year of the lease.
d. Prepare the journal entries required for SCC in the first year of the lease if it classifies the lease as an operating lease.
e. What type of lease is this for the lessor? Justify your answer. . .