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Required: a. Compute the implicit rate. b. Determine the lease classification for both lessee and lessor. c. Prepare the necessary journal entries for the lessee for Year 1.

Required: a. Compute the implicit rate. b. Determine the lease classification for both lessee and lessor. c. Prepare the necessary journal entries for the lessee for Year 1.

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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Ss.113.

Lessee Company entered into a lease contract with Lessor Company. Both companies are calendar year companies that prepare annual financial statements. Both use straight-line depreciation with a beginning of month convention. Information about the lease contract is as follows: o Inception date: January 1. Year 1 O Commencement date: January 1, Year 1 O Lease term: 5 years O Lessor makes no lease incentive payments. O O O O O First recurring lease payment of $100,000 occurs on January 1, Year 1 Lease payments of $100,000 will be made on December 31 of Years 1 through 4. Lessor expects a residual value of $20,000. This amount is guaranteed by the lessee. The fair value of the asset is $425,000. The lease agreement does not transfer ownership of the equipment and it does not contain purchase option. o The lessor incurred initial direct costs of $7,000 on January 1, Year 1. O Lessee can compute Lessor's implicit rate. o The leased asset has a 6-yea expected life. Lessee is in excellent financial health. O Required: a. Compute the implicit rate. b. Determine the lease classification for both lessee and lessor. c. Prepare the necessary journal entries for the lessee for Year 1.
Transcribed Image Text:Lessee Company entered into a lease contract with Lessor Company. Both companies are calendar year companies that prepare annual financial statements. Both use straight-line depreciation with a beginning of month convention. Information about the lease contract is as follows: o Inception date: January 1. Year 1 O Commencement date: January 1, Year 1 O Lease term: 5 years O Lessor makes no lease incentive payments. O O O O O First recurring lease payment of $100,000 occurs on January 1, Year 1 Lease payments of $100,000 will be made on December 31 of Years 1 through 4. Lessor expects a residual value of $20,000. This amount is guaranteed by the lessee. The fair value of the asset is $425,000. The lease agreement does not transfer ownership of the equipment and it does not contain purchase option. o The lessor incurred initial direct costs of $7,000 on January 1, Year 1. O Lessee can compute Lessor's implicit rate. o The leased asset has a 6-yea expected life. Lessee is in excellent financial health. O Required: a. Compute the implicit rate. b. Determine the lease classification for both lessee and lessor. c. Prepare the necessary journal entries for the lessee for Year 1.
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