Question TWO Rentco leasing company enters in to an agreement to lease equipment to EABL on 01 January 2018. The following details are available about the lease. ● ● ● ● ● The term of the non-cancellable lease is 5 years with no renewal option. The equipment has an estimated economic life of 6 years. The value of the asset as at 01 January 2015 is $90,000 The asset is to revert to the lessor at the end of the lease term. ● EABL assumes the direct responsibility for all executory costs of $ 3,500 being property taxes and insurance. The agreement requires equal annual rental payments of $20,5411.11 to the lessor beginning 01 January 2018. • The lessee's incremental borrowing cost is 12%. The lessors implicit rate is 10% and is known by the lessee. EABL uses straight line depreciation method. Required a) What type of lease is this? Justify your answer appropriately. b) Prepare the amortization schedule for the lease c) Prepare all journal entries for the lessee for 2018 and 2019 to record the lease, the lease payments and all expenses related to the lease. Assume the lessee's annual accounting period ends on 31 December.
Question TWO Rentco leasing company enters in to an agreement to lease equipment to EABL on 01 January 2018. The following details are available about the lease. ● ● ● ● ● The term of the non-cancellable lease is 5 years with no renewal option. The equipment has an estimated economic life of 6 years. The value of the asset as at 01 January 2015 is $90,000 The asset is to revert to the lessor at the end of the lease term. ● EABL assumes the direct responsibility for all executory costs of $ 3,500 being property taxes and insurance. The agreement requires equal annual rental payments of $20,5411.11 to the lessor beginning 01 January 2018. • The lessee's incremental borrowing cost is 12%. The lessors implicit rate is 10% and is known by the lessee. EABL uses straight line depreciation method. Required a) What type of lease is this? Justify your answer appropriately. b) Prepare the amortization schedule for the lease c) Prepare all journal entries for the lessee for 2018 and 2019 to record the lease, the lease payments and all expenses related to the lease. Assume the lessee's annual accounting period ends on 31 December.
Chapter1: Financial Statements And Business Decisions
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Transcribed Image Text:Question TWO
Rentco leasing company enters in to an agreement to lease equipment to EABL on 01
January 2018. The following details are available about the lease.
●
●
●
●
●
The term of the non-cancellable lease is 5 years with no renewal option. The
equipment has an estimated economic life of 6 years.
The value of the asset as at 01 January 2015 is $90,000
The asset is to revert to the lessor at the end of the lease term.
EABL assumes the direct responsibility for all executory costs of $ 3,500 being
property taxes and insurance.
The agreement requires equal annual rental payments of $20,5411.11 to the lessor
beginning 01 January 2018.
The lessee's incremental borrowing cost is 12%. The lessors implicit rate is 10%
and is known by the lessee.
EABL uses straight line depreciation method.
Required
a) What type of lease is this? Justify your answer appropriately.
b) Prepare the amortization schedule for the lease
c) Prepare all journal entries for the lessee for 2018 and 2019 to record the lease,
the lease payments and all expenses related to the lease. Assume the lessee's
annual accounting period ends on 31 December.
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