Sarasota Corporation entered into a lease agreement on January 1, 2020, to provide Ivanhoe Company with a piece of machinery. The terms of the lease agreement were as follows. 1. The lease is to be for 3 years with rental payments of $9,066 to be made at the beginning of each year. 2. The machinery has a fair value of $61,000, a book value of $46,800, an end-of-life salvage value of $0, and an economic life of 8 years. 3. At the end of the lease term, both parties expect the machinery to have a residual value of $39,200, none of which is guaranteed. 4. The lease does not transfer ownership at the end of the lease term, does not have a bargain purchase option, and the asset is not of a specialized nature. 5. The implicit rate is 6%, which is known by Ivanhoe. 6. Collectibility of the payments is probable. 7. Assume that the lessor uses straight-line depreciation. (a) Evaluate the criteria for classification of the lease, and describe the nature of the lease. For the lessee, it is a select a type of lease _ , and for the lessor, it is a select a type of lease ____. (Options: operating lease / sales-type lease / finance lease) b. Prepare the amortization schedules Ivanhoe will use over the lease term. c. Prepare the 2020 journal entries for Ivanhoe. d. Prepare the 2020 journal entries for Sarasota.

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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Sarasota Corporation entered into a lease agreement on January 1, 2020, to provide Ivanhoe Company with a piece of machinery. The terms of the lease agreement were as follows.

1.		The lease is to be for 3 years with rental payments of $9,066 to be made at the beginning of each year.
2.		The machinery has a fair value of $61,000, a book value of $46,800, an end-of-life salvage value of $0, and an economic life of 8 years.
3.		At the end of the lease term, both parties expect the machinery to have a residual value of $39,200, none of which is guaranteed.
4.		The lease does not transfer ownership at the end of the lease term, does not have a bargain purchase option, and the asset is not of a specialized nature.
5.		The implicit rate is 6%, which is known by Ivanhoe.
6.		Collectibility of the payments is probable.
7.		Assume that the lessor uses straight-line depreciation.

(a) Evaluate the criteria for classification of the lease, and describe the nature of the lease.

For the lessee, it is a select a type of lease ___________ , and for the lessor, it is a select a type of lease ______________. (Options: operating lease / sales-type lease / finance lease)

b. Prepare the amortization schedules Ivanhoe will use over the lease term.

c. Prepare the 2020 journal entries for Ivanhoe.

d. Prepare the 2020 journal entries for Sarasota.

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