On January 1, 2008, McNathy, Inc. and Julius Corp. sign a 3-year, non-cancelable lease agreement whereby McNathy (lessor) and Julius (lessee) agree to the following terms for Julius’ use of equipment owned by McNathy:

1. The equipment has a useful life of three years.
2. The three lease payments are $33,461.73 each, payable on January 1, 2008, 2009, and 2010.
3. The fair value of the equipment at the commencement of the lease is $100,000.
4. The lease does not contain a renewal or purchase option, and the equipment must be returned by Julius to McNathy at the end of the lease.
5. The contract requires Julius to guarantee the residual value of the equipment at the end of the lease for $5,000. Julius estimates the residual value of the equipment at the end of the lease will be $3,000.
6. Julius’ incremental borrowing rate is 4.5%.
7. Julius uses the straight-line method to depreciate its assets for financial accounting purposes.
8. Julius’ uses a December 31 fiscal year end.
9. McNathy uses a rate of 5% to set up the lease payments, and this rate is known by Julius.
10. Julius paid cash of $800 in initial direct costs (legal fees related to the execution of the lease).

Required:

1. Determine the proper lease classification for financial reporting purposes on January 1, 2008.
2. Calculate Julius’ lease liability/obligation.
3. Determine Julius’ right-of-use asset.
4. Prepare the amortization schedule for the lease obligation.

Answer rating: 100% (QA)

Answer Calculation fo PV of the lease liability Annual lease payment 3346173 285941 PVADF53 years PV ... View the full answer