Rodriguez Corporation leases a building to Olaf, Inc.

on January $1,2025.$ The following facts pertain to the lease agreement:

$1.$ The lease term is $8$ years with equal annual rental payments of $$13,679$ at the end of each year.

$2.$ Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and

the asset is not of a specialized nature.

$3.$ The building has a fair value of $$100,000,$ a book value to Rodriguez of $$82,000,$ and a useful life

of $20$ years.

$4.$ At the end of the lease term, Rodriguez and Olaf expect the residual value of the building to be

$$24,000,$ and this amount is guaranteed by Financial, Inc., a third party.

$5.$ Rodriguez wants to earn a $6\%$ return on the lease, and collectibility of the payments is probable.

Instructions

$($Round all numbers to the nearest dollar.$)$

a$.$ Describe the nature of this lease to both Rodriguez and Olaf.

b$.$ Assume the present value of lease payments and third$-$party guarantee is $$100,000$ and the rate of

return to amortize the net lease receivable to zero is $10\mathrm{.}64\%.$ Prepare the amortization schedules

Rodriguez would use to amortize the net lease receivable to zero.

c$.$ Prepare the journal entries to record the entries for Rodriguez for $2025$ and $2026.$

d$.$ Prepare the journal entries for Olaf $($the lessee$)$ for $2025$ and $2026,$ assuming the rate implicit in the

lease is known to Olaf.

e$.$ Suppose the leased asset had a shorter economic life of $10$ years, the lease agreement was only for $6$ years,

and the residual value of $$140,000$ guaranteed by Financial, Inc. remained the same. Would the rate of

return required to amortize the net lease receivable to zero increase, decrease, or stay the same? Explain.

f$.$ Suppose, instead of Financial, Inc., Olaf guarantees the residual value itself. How would this affect

the classification of this lease agreement for both Rodriguez and Olaf? Describe the impact that any

change in classification would have on revenue recognition for Rodriguez.

Answer rating: 100% (QA)

Answer a Nature of Lease For Rodriguez This lease is an operating lease because ownership does not transfer to Olaf at the end of the lease term there... View the full answer