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REQUIRED: 1. Identify the type of lease involved for Lakeshore Gelato and Gelato Equipment Company and give reasons for your classifications. 2. Prepare appropriate journal entries for Year 1 for the lessee and lessor.

REQUIRED: 1. Identify the type of lease involved for Lakeshore Gelato and Gelato Equipment Company and give reasons for your classifications. 2. Prepare appropriate journal entries for Year 1 for the lessee and lessor.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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On January 1, Year 1, Lakeshore Gelato (Lessee) leases nonspecialized equipment for 5 years, agreeing to pay $65, 000 annually at the beginning of each year under the noncancelable lease. Gelato Equipment Company, the lessor, agrees to remit all executory costs, estimated to be $3,450 per year. The cost of the equipment is $275, 000, and the fair value of the equipment is $305, 000. Its estimated life is 10 years. The estimated residual value at the end of 5 years is $75,000 and is not guaranteed by Lakeshore Gelato; at the end of 10 years, it is $5,000. There is no bargain purchase option in the lease or any agreement to transfer ownership at the end of the lease to the lessee. The implicit interest rate is 12%. On October 1 of each year, Gelato Equipment Company pays property taxes of $650, maintenance costs of $1, 600, and insurance of $1,200. Straight-line depreciation is considered the appropriate method by both companies. REQUIRED: 1. Identify the type of lease involved for Lakeshore Gelato and Gelato Equipment Company and give reasons for your classifications. 2. Prepare appropriate journal entries for Year 1 for the lessee and lessor.
Transcribed Image Text:On January 1, Year 1, Lakeshore Gelato (Lessee) leases nonspecialized equipment for 5 years, agreeing to pay $65, 000 annually at the beginning of each year under the noncancelable lease. Gelato Equipment Company, the lessor, agrees to remit all executory costs, estimated to be $3,450 per year. The cost of the equipment is $275, 000, and the fair value of the equipment is $305, 000. Its estimated life is 10 years. The estimated residual value at the end of 5 years is $75,000 and is not guaranteed by Lakeshore Gelato; at the end of 10 years, it is $5,000. There is no bargain purchase option in the lease or any agreement to transfer ownership at the end of the lease to the lessee. The implicit interest rate is 12%. On October 1 of each year, Gelato Equipment Company pays property taxes of $650, maintenance costs of $1, 600, and insurance of $1,200. Straight-line depreciation is considered the appropriate method by both companies. REQUIRED: 1. Identify the type of lease involved for Lakeshore Gelato and Gelato Equipment Company and give reasons for your classifications. 2. Prepare appropriate journal entries for Year 1 for the lessee and lessor.
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