ACCT 3230: Problem Set #1 (Spring 2023) Chap 17: Accounting for Leases (Lessee) Earth, Inc. (lessor) and Moon Colony 2 (MC2, lessee) signed a 20-year non-cancelable lease for sky-projection equipment on December 28, 2399. The lease agreement has a January 1, 2400 commencement date and the following details:

1. The projection equipment has an estimated economic life of 28 years.

2. Earth, Inc. routinely leases this type of equipment to space colonies.

3. The annual lease payment is $262,000, payable starting January 1, 2400 and ending with a final payment on January 1, 2419 (for a total of 20 payments). MC2 (lessee) made the first payment on January 1, 2400, as scheduled.

4. The fair value of the projection equipment at lease commencement is $3,000,000.

5. The lease does not contain a renewal or purchase option, and the asset reverts to Earth, Inc. at the end of the 20-year lease period.

6. The lease includes a guaranteed residual value clause, whereby MC2 (lessee) guarantees the asset will be worth at least $200,000 at the end of the lease term. MC2 expects the asset to be worth only $160,000 at the end of the lease term.

7. The rate implicit in the least (which is known to the lessee) is 9%.

8. MC2 is a calendar year-end space colony.

9. MC2 incurred $14,000 in legal and permitting fees to execute the lease, which they paid in cash on December 28, 2399. Required (from the lessees, MC2) perspective:

a. Determine the appropriate lease classification.

b. Record the entries required in December 2399 (if any) for this lease.

c. Calculate the lease liability (before MC2 makes its first payment) and the right-of-use asset at lease commencement.

d. Prepare MC2s journal entries for 2400 (first year of the lease).

e. Prepare MC2s journal entries for 2401.

f. Prepare MC2s journal entries for 2419 (final year of the lease), assuming that the asset is worth $154,000 at the end of the lease term.