Problem 3 (70 Points) Lease Accounting

Angelo Incorporated leases a piece of machinery to Ghandra Company on January 1, 2017, under the following terms.

1. The lease is to be for 4 years with rental payments of $15,599 to be made at the beginning of each year.
2. The machinery has a fair value of $77,000, a book value of $50,000, and an economic life of 10 years.
3. At the end of the lease term, both parties expect the machinery to have a residual value of $23,000. To protect against a large loss, Angelo requests Ghandra to guarantee $17,500 of the residual value, which Ghandra agrees to do.
4. The lease does not transfer ownership at the end of the lease term, does not have any bargain purchase options, and the asset is not of a specialized nature.
5. The implicit rate is 5%, which is known by Ghandra.
6. Collectibility of the payments is probable.

Part A (4 points): Show how Angelo Incorporated calculated the annual rental payment of $15,599.

Part B (5 points): Using the lease classification tests, what type of lease is this for Ghandra Company? Please note which tests it passes and which it fails (must show all 5 tests).

Part C (1 point): Calculate the Lease Liability for Ghandra Company.

Part D (6 points): Prepare the Amortization Table for Ghandra Company.

Date	Rent Receipt / Payment	Interest Revenue / Expense	Reduction of Principal	Receivable / Liability
1/1/2017	$15,598.70
1/1/2018	$15,598.70
1/1/2019	$15,598.70
1/1/2020	$15,598.70

Part E (12 points): Prepare the journal entries for Ghandra for the year 2017.

Part F (1 point): What type of lease is this for Angelo? Note: You can rely on the classification tests you performed in Part B.

Part G (1 point): Calculate the Lease Receivable for Angelo

Part H (6 points): Prepare the amortization table for Angelo

Date	Rent Receipt / Payment	Interest Revenue / Expense	Reduction of Principal	Receivable / Liability
1/1/2017	$15,598.70
1/1/2018	$15,598.70
1/1/2019	$15,598.70
1/1/2020	$15,598.70

Part I (12 points): Prepare the journal entries for Angelo for the year 2017.

Part J (1 point): Suppose Ghandra did not guarantee any amount of the expected residual value. Does that change the lease classification? Why or why not?

Part K (12 points): Given your work in (J): prepare the journal entries for Ghandra for the year 2017

Part L (9 points): Given your work in (J): prepare the journal entries for Angelo for the year 2017.