AC Milan Sales and Service entered into a lease agreement to lease a fleet of six vehicles from Badger Motors. The term of the lease is five years and AC Milan makes annual payments of $30,000 per year beginning on January 1, 2019 (and then every December 31 through December 31, 2022). January 1, 2019 is also the lease commencement date. AC Milan does not guarantee any residual value in the lease agreement. AC Milan received $8,000 on 1/1/19 as an incentive to sign the lease agreement and incurred initial direct costs in 2018 of $4,000 related to the lease that were recorded as prepaid assets. The estimated economic life of the vehicles is eight years and their fair value at lease commencement is $200,000. AC Milan is unaware of Badger's implicit rate, but AC Milan's  incremental borrowing rate is 4% per year. There is no transfer of ownership at the end of the lease, nor is there a purchase option. The vehicles are not of a specialized nature. 

Required: 

a. What type of lease has AC Milan signed? Explain in terms of the new US GAAP standard (ASC 842).

b. Prepare all of the 2019 journal entries for AC Milan. 

c. Prepare all of the 2020 journal entry(ies) for AC Milan. 

d. Prepare all of the 2023 journal entries for AC Milan.

Answer rating: 100% (QA)

Answer a This is a operating lease as there is no transfer of ownership and the leased asset is ... View the full answer