PT A agrees to lease equipment to PT B on January 1, 2019. The following information relates to the lease agreement.
1. The term of the lease is 7 years with no renewal option. The equipment has an estimated economic life of 9 years.
2. The cost of equipment is $525,000 and the fair value of the asset on January 1, 2019 is $700,000.
3. At the end of the lease term, the equipment will be returned to the lessor and has a guaranteed residual value of $50,000.
Lessee estimates that the expected residual value at the end of the lease contract will be at least $50,000. Lessee amortizes leased equipment on a straight line basis.
4. The lease agreement requires equal annual rental payments, beginning on January 1, 2019.
5. Lessor desires 5% rate of return on its investments. Lessee's incremental borrowing rate is 6%. Lessee does not know implicit rate of lessor.
Instructions:
PART A
a. Decide the type of this lease for the lessor. Explain your answer briefly.
b. Calculate the amount of annual rental payment.
c. Compute the value of the lease liability to the lessee.
d. Prepare Lease Amortization Table for the lessor.
e. Prepare Lease Amortization Table for the lessee.
f. Prepare the journal entries for Lessor in 2019 and 2020.
g. Prepare the journal entries for Lessee in 2019 and 2020.
h. Prepare the journal entries when the equipment is returned to lessor the end of lease contract for both lessor and lessee.
PART B
Assume Lessee expects the residual value at the end of the lease term to be $40,000 (but still guarantees a residual of $50,000),
a. Compute the value of the lease liability to the lessee.
b. Prepare Lease Amortization Table for Lessee.
c. Prepare the journal entries when the equipment is returned to lessor the end of lease contract for both lessor and lessee.

Answer rating: 100% (QA)

Lease term 7 Years Economic life 9 years 763 Fair v... View the full answer