On January 1, 2019, Ballieu Company leases specialty equipment with an economic life of 8 years to Anderson Company. The lease contains the following terms and provisions:•The lease is noncancelable and has a term of 8 years.•The annual rentals are $39,200, payable at the beginning of each year.•The interest rate implicit in the lease is 11%.•Anderson agrees to pay all executory costs directly to a third party and is given an option to buy the equipment for $1 at the end of the lease term, December 31, 2026.•The cost of the equipment to the lessor is $145,500, and the fair value is approximately $223,900.•Ballieu incurs no material initial direct costs.•It is probable that Ballieu will collect the lease payments.•Ballieu estimates that the fair value is expected to be significantly greater than $1 at the end of the lease term. Ballieu calculates that the present value on January 1, 2019, of 8 annual payments in advance of $39,200 discounted at 11% is $223,918.08 (the $1 purchase option is ignored as immaterial).Required:1.Next Level Identify the classification of the lease transaction from Ballieu’s point of view. Give the reasons for your classification.2.Prepare all the journal entries for Ballieu for the years 2019 and 2020.

1. Requirement 1 Lessor should classify the above lease as finance lease reason: 1. The lessee holds…

Answered: e lease is noncancelable and has a term…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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On January 1, 2019, Ballieu Company leases specialty equipment with an economic life of 8 years to Anderson Company. The lease contains the following terms and provisions:

•	The lease is noncancelable and has a term of 8 years.
•	The annual rentals are $39,200, payable at the beginning of each year.
•	The interest rate implicit in the lease is 11%.
•	Anderson agrees to pay all executory costs directly to a third party and is given an option to buy the equipment for $1 at the end of the lease term, December 31, 2026.
•	The cost of the equipment to the lessor is $145,500, and the fair value is approximately $223,900.
•	Ballieu incurs no material initial direct costs.
•	It is probable that Ballieu will collect the lease payments.
•	Ballieu estimates that the fair value is expected to be significantly greater than $1 at the end of the lease term.

Ballieu calculates that the present value on January 1, 2019, of 8 annual payments in advance of $39,200 discounted at 11% is $223,918.08 (the $1 purchase option is ignored as immaterial).

Required:

1.	Next Level Identify the classification of the lease transaction from Ballieu’s point of view. Give the reasons for your classification.
2.	Prepare all the journal entries for Ballieu for the years 2019 and 2020.

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