On January 1, 2017, Galactus Corp. (lessor) entered into a noncancellable lease agreement with Blade Corp. (lessee) for machinery which was carried in Galactus’s accounting records at $2,265,000 and had a fair value of $2,400,000. Minimum lease payments under the lease agreement, which expires on December 31, 2026, total $3,550,000. Payments of $355,000 are due each January 1. The first payment was made on January 1, 2017 when the lease agreement was finalized. The interest rate of 10% which was stipulated in the lease agreement is the implicit rate set by the lessor. The effective interest method is being used. Blade expects the machine to have a ten-year life with no residual value, and be depreciated on a straight-line basis. Collectability of the rentals is reasonably assured, and there are no important uncertainties surrounding the costs yet to be incurred by Galactus. Both entities are small private corporations that follow ASPE.

Instructions

a. From the lessee's viewpoint, what kind of lease is the above agreement? From the lessor's viewpoint, what kind of lease is the above agreement?

b. Ignoring income taxes, what should be the income reported by Galactus from the lease for calendar 2017?

c. Ignoring income taxes, what should be the expenses incurred by Blade from this lease for the calendar 2017?

d. What journal entries should be recorded by Blade Corp. on January 1, 2017?

e. What journal entries should be recorded by Galactus Corp. on January 1, 2017?

Answer rating: 100% (QA)

SOLUTION A THE ESTIMATION USEFUL LIFE IS AROUND 10 YEARS AND THE LEASE PERIOD IS ALSO AROUND 10 YEAR... View the full answer