On January 1, 2020, Company A (lessee) entered into a non-cancellable lease agreement with Company B (lessor) for a specialized piece of equipment. The detail on the lease are as follows:
- The lease is for three years;
- The asset has an economic life of five years.
- The lessee is to pay the lessor $40000 at the beginning of each year – a part of each payment is a $2500 annual maintenance cost, to be completed by the lessor.
- At the end of the lease the lessee has the option to buy the equipment for $7000 or return the equipment to the lessor. It is fairly certain to both the lessor and lessee that the purchase option will be taken at the end of the lease;
- The lessor purchased the equipment for $70000;
- The lessee’s expected rate is 5%. The lessor’s rate is not known at the time the lease was signed;
- Assume both lessor and lessee have a Dec 31 year end.

Prepare ALL the journal entries for 2020 and 2021 related to this transaction for the lessee.
Prepare ALL the journal entries for 2020 related to this transaction for the lessor.

Answer rating: 100% (QA)

Journal entries in the books of lessee Year ended 2020 aLeas... View the full answer