(a) What kind of lease is this to Ehrlich Company? Describe in detail and show your calculations as to which test(s) this lease passes. (b) What is the present value of the lease payments? (c) What journal entries would Ehrlich record during 2021 and on 1/1/2022? (Include an amortization schedule through 1/1/23 and round to the nearest dollar.)
16)
Ehrlich Company on January 1, 2021, enters into a 20-year noncancelable lease for equipment having an estimated useful life of 21 years and a fair value to the lessor, at the inception of the lease of $4,000,000. Ehrlich’s incremental borrowing rate is 4%. Ehrlich uses the straight-line method to
- Rental payments of $266,000 are payable at the beginning of each year.
- A guaranteed residual value by Ehrlich Company for $80,000 at the expiration of the lease. Ehrlich expects to have to pay this entire amount.
Instructions
(a) What kind of lease is this to Ehrlich Company? Describe in detail and show your calculations as to which test(s) this lease passes.
(b) What is the present value of the lease payments?
(c) What journal entries would Ehrlich record during 2021 and on 1/1/2022? (Include an amortization schedule through 1/1/23 and round to the nearest dollar.)
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