Sarh Pieces Inc. creates aluminum alloy parts for commercial aircraft. In a recent transaction, Sarh leased a high-precision lathe machine from Pranav Revolving Corp. on January 1, 2019. The following information pertains to the leased asset and the lease agreement: Cost of the lathe to the lessor $140,000 Pranav's normal selling price for lathe $178,268 Useful life 7 years Estimated value at end of useful life $8,000
Question # 1 (20 marks)
Sarh Pieces Inc. creates aluminum alloy parts for commercial aircraft. In a recent transaction, Sarh leased a high-precision lathe machine from Pranav Revolving Corp. on January 1, 2019. The following information pertains to the leased asset and the lease agreement:
|
Cost of the lathe to the lessor |
$140,000 |
|
Pranav's 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 the lease |
January 1 |
|
Payment timing |
December 31 |
|
Estimated residual value at end of the lease (unguaranteed) |
$20,000 |
|
Interest rate implicit in the lease (readily determinable by lessee) |
7% |
The lathe machine will revert back to the lessor at end of the lease term, the title does not transfer to the 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. (Same criteria as Lessee)
- Classify this lease from the perspective of the lessor, Pranav Revolving Corp.
- Prepare an amortization schedule for the lessor.
- Prepare the
journal entries on January 1, 2019, and December 31, 2019, for the lessor.
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