On January 1 of Year 1, Lessee Inc. leased equipment at an annual payment of $187,218,...

 

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On January 1 of Year 1, Lessee Inc. leased equipment at an annual payment of $187,218, payable each January 1 for four years, with the first payment due immediately. The equipment had a fair value of $880,000 and a book value of $825,000, and was commonly purchased or leased by customers. The lessor estimates that the equipment has an estimated useful life of eight years and an estimated residual value of $275,000, not guaranteed by the lessee. Lessor's implicit rate is 7.5%, which is unknown to the lessee. The lessee's incremental borrowing rate is 8%. The lease does not contain a purchase option or a renewal option. The lessee had no other costs associated with this lease. Required a. How would Lessee Inc. classify the lease? 13 Operating Lease + Lease Liability Schedule Right-of-Use Asset Schedule Journal Entries b. Prepare a schedule of the lease liability for the 4-year lease term. Note: Round each amount in the schedule to the nearest whole dollar. Use the rounded amount for later calculations in the schedule. Lease Interest Lease Liability Date Jan. 1, Year 1 Jan. 1, Year 1 s Jan. 1, Year 2 S Jan. 1, Year 3 s Jan. 1, Year 4 S Total S Payment on Liability Change Lease Liability 187,218 S 187,218 S 187,218 S 187,218 S 01$ 187,218 $ 0x 187,218 x 0 x $ 0 x $ 0* 0x $ 0 * $ 0 0 * $ 0*$ 0 748,872 $ 05 187,218 4:45 PM On January 1 of Year 1, Lessee Inc. leased equipment at an annual payment of $187,218, payable each January 1 for four years, with the first payment due immediately. The equipment had a fair value of $880,000 and a book value of $825,000, and was commonly purchased or leased by customers. The lessor estimates that the equipment has an estimated useful life of eight years and an estimated residual value of $275,000, not guaranteed by the lessee. Lessor's implicit rate is 7.5%, which is unknown to the lessee. The lessee's incremental borrowing rate is 8%. The lease does not contain a purchase option or a renewal option. The lessee had no other costs associated with this lease. Required a. How would Lessee Inc. classify the lease? 13 Operating Lease + Lease Liability Schedule Right-of-Use Asset Schedule Journal Entries b. Prepare a schedule of the lease liability for the 4-year lease term. Note: Round each amount in the schedule to the nearest whole dollar. Use the rounded amount for later calculations in the schedule. Lease Interest Lease Liability Date Jan. 1, Year 1 Jan. 1, Year 1 s Jan. 1, Year 2 S Jan. 1, Year 3 s Jan. 1, Year 4 S Total S Payment on Liability Change Lease Liability 187,218 S 187,218 S 187,218 S 187,218 S 01$ 187,218 $ 0x 187,218 x 0 x $ 0 x $ 0* 0x $ 0 * $ 0 0 * $ 0*$ 0 748,872 $ 05 187,218 4:45 PM