Bart Co. leases a common piece of equipment to Lisa Corp. The lease begins on January 1, 2020, and includes the following terms:

• The lease is for 6 years and is non-cancelable.
• The equipment reverts to Bart Co. at the end of the lease, with no renewal or purchase options.
• Lisa Corp. guarantees a residual value of $25,000. This is also the expected residual value.
• Bart Co. uses an implicit interest rate of 4% to set the lease payments of $16,369, which are due at the beginning of each year, starting with January 1, 2020. The collectability of these payments is probable.
• The implicit interest rate is known to Lisa Corp. Lisa’s incremental borrowing rate is 5%.
• The fair value of the equipment is $109,000 at the inception of the lease. Its estimated remaining economic life is 20 years. The cost of the equipment on Bart Co.’s books is $100,000.
• Both parties use straight-line depreciation when accounting for similar pieces of equipment.

What is the value of the Right of Use Asset that Lisa Corp. (the lessee) should report on its balance sheet for December 31, 2020?

A. $14,874

B. $74,367

C. $84,779

D. $89,241

E. $90,833

How much interest expense should Lisa Corp. (the lessee) report on its income statement for 2021?

A. $2,377

B. $2,915

C. $3,199

D. $3,570

E. $3,705

How much Sales Revenue should Bart Co. (the lessor) record at the inception of the lease?

A. $0

B. $72,872

C. $89,241

D. $84,000

E. $109,000

What is the value of the Lease Receivable that Bart Co. (the lessor) should report on its balance sheet for December 31, 2020?

A. $72,872

B. $75,787

C. $92,631

D. $96,336

E. $113,360

Answer rating: 100% (QA)

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