Lewis Machinery Works entered into a lease agreement on January 1, 2019, to provide Garcia SA with a piece of machinery. The terms of the lease agreement were as follows.
1. The lease is to be for 3 years with rental payments of R$10,521 to be made at the beginning of each year.
2. The machinery has a fair value of R$55,000, a book value of R$40,000, and an economic life of 8 years.
3. At the end of the lease term, both parties expect the machinery to have a residual value of R$30,000, none of which is guaranteed.
4. The lease does not transfer ownership at the end of the lease term, does not have a bargain purchase option, and the asset is not of a specialized nature.
5. The implicit rate is 6%, which is known by Garcia.
6. Collectibility of the payments is probable.
Instructions
a. Evaluate the criteria for classification of the lease, and describe the nature of the lease.
b. Prepare the amortization schedules Garcia will use over the lease term.
c. Prepare the 2019 journal entries for Garcia.
d. Prepare the 2019 journal entries for Lewis.
e. Suppose the lease were only for 1 year instead of 3 years, with just one lease payment at the beginning of the lease term. Prepare any journal entries Garcia would need, assuming it elects to use the short-term lease option.