On January 1, 2019, a lessor agrees to rent a truck with fair value and carrying value of $129,999 for a period of four years at an annual rental of $34,478 first payable at the commencement date. The truck’s residual value is estimated to be $20,000. The interest rate implicit in the lease is 12%, and the lessee cannot readily determine this. The lessee’s incremental borrowing rate is 10%. Previous analysis has already concluded that this is a direct financing lease for the lessor. 

Required:

For parts (a) through (e), assume that the lessee has guaranteed the residual value and that the expected payout under the guarantee was $20,000. 

a. Compute the lessor’s net investment in the lease at initial recognition. 

b. Compute the value of the lessee’s ROU asset and lease liability at initial recognition. 

c. Prepare the lessor’s journal entries for each of January 1, 2019, December 31, 2019, and January 1, 2020. 

d. Prepare the lessee’s journal entries for each of January 1, 2019, December 31, 2019, and January 1, 2020.

e. Record the lessor’s journal entries on January 1, 2023, to derecognize the net investment in the lease assuming that the truck’s actual residual value is (i) $20,000; (ii) $4,000; or (iii) $35,000. 

f. Record the lessee’s journal entries on January 1, 2023, to derecognize the net investment in the lease assuming that the truck’s actual residual value is (i) $20,000; (ii) $4,000; or (iii) $35,000. For part (g), assume that the residual value is not guaranteed. 

g. Prepare the lessee’s journal entries for each of January 1, 2019, December 31, 2019, and January 1, 2020.