Raptors Inc. creates aluminum alloy parts for commercial aircraft. In a recent transaction Raptors leased a high precision lathe machine from Grizzlies Corp. on January 1, 2024. The following information pertains to the leased asset and the lease agreement: Cost of lathe to lessor $140,000 Grizzlies normal selling price for lathe 178,268 Useful life 7 years Estimated value at end of useful life 8,000 Lease provisions Lease term 5 years Payment frequency Annual Start date of lease January 1 Payment timing December 31 Estimated residual value at end of lease (unguaranteed) 20,000 Interest rate implicit in the lease (readily determinable by lessee) 7% Lessee's incremental borrowing rate 8% The lathe machine will revert back to the lessor at end of lease term, title does not transfer to lessee at any time, and there is not a bargain purchase option. Required Determine the amount of lease payment that the lessor would require to lease the asset to an outside party. Classify this lease from the perspective of the lessor, Grizzlies Corp. Prepare the journal entries on January 1, 2024, and December 31, 2024, for the lessor.
Raptors Inc. creates aluminum alloy parts for commercial aircraft. In a recent transaction Raptors leased a high precision lathe machine from Grizzlies Corp. on January 1, 2024. The following information pertains to the leased asset and the lease agreement:
|
Cost of lathe to lessor |
$140,000 |
|
Grizzlies normal selling price for lathe |
178,268 |
|
Useful life |
7 years |
|
Estimated value at end of useful life |
8,000 |
|
Lease provisions |
|
|
Lease term |
5 years |
|
Payment frequency |
Annual |
|
Start date of lease |
January 1 |
|
Payment timing |
December 31 |
|
Estimated residual value at end of lease (unguaranteed) |
20,000 |
|
Interest rate implicit in the lease (readily determinable by lessee) |
7% |
|
Lessee's incremental borrowing rate |
8% |
The lathe machine will revert back to the lessor at end of lease term, title does not transfer to lessee at any time, and there is not a bargain purchase option.
Required
- Determine the amount of lease payment that the lessor would require to lease the asset to an outside party.
- Classify this lease from the perspective of the lessor, Grizzlies Corp.
- Prepare the journal entries on January 1, 2024, and December 31, 2024, for the lessor.
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