On January 1, 2023, Highland leased equipment to Larkin Company under a six-year noncancelable lease agreement. The following information about the lease and the equipment is provided:

1. Equal annual payments that are due on January 1 each year provide Highland with an 8% return on net investment.

2. Title to the equipment passes to Larkin at the end of the lease.

3. The fair value of the equipment is $600,0000. The cost of the equipment to Highland is $540,000. The equipment has an expected useful life of nine years.

4. Collectability of the lease payments is probable.

Instructions

(a) Using the lease tests, determine what type of lease this is for the lessor.

(b) Calculate the annual lease payment. (Round to nearest dollar.)

(c) Prepare a lease amortization schedule for Highland Corporation for the first three years.

(d) Prepare the journal entries for the lessor for 2023 to record the lease agreement, the receipt of the lease rentals, and the recognition of revenue (assume the use of a perpetual inventory method and round all amounts to the nearest dollar).

Answer rating: 100% (QA)

a The lease agreement meets the criteria for a finance lease for the lessor because the lease term 6 ... View the full answer