Y2 On January 1, 2018, Lessor Able leased a machine to Lessee Baker on a six-year lease. The machine was purchased by Able immediately prior to the lease; the machine cost Able $400,000. The cash selling price of this machine is $400,000. The machine has a seven-year estimated useful life. The asset goes back to the lessor at the end of the lease term. The lessee guarantees that the residual value will be at least $30,000 when the asset is returned to the lessor at the end of year 6 and the lessee believes that the asset will be worth $20,000 at the end of the lease term. The lessor used a 4% percent target rate of return. The accounting period for each com¬pany ends on December 31 and lease payments will be made beginning on January 1, 2018 and each year thereafter. Collectability of the lease payments is not an issue. Assume a marginal tax rate of 20%. REQUIRED: 1. Is this an operating or finance lease? Why? (Hint: you should determine this is a finance lease) 2. Calculate the lease payments. 3. Prepare the journal entries for the lessee & lessor for the first two years including any deferred tax entries. Assume the leased asset is returned to the lessor at the end of the lease term and is worth $75,000. 4. Prepare the balance sheet and income statement for the lessee & lessor as of December 31 for 2018. 5. Prepare the SCF for the lessee and lessor for the year ended 12/31/18 and 12/31/19 (using the indirect method for CF from Operating Activities). 6. Prepare the SCF for the lessee and lessor for the year ended 12/31/18 and 12/31/19 (using the direct method for CF from Operating Activities).

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Related questions

Concept explainers

Question

Y2 On January 1, 2018, Lessor Able leased a machine to Lessee Baker on a six-year lease. The machine was purchased by Able immediately prior to the lease; the machine cost Able $400,000. The cash selling price of this machine is $400,000. The machine has a seven-year estimated useful life. The asset goes back to the lessor at the end of the lease term. The lessee guarantees that the residual value will be at least $30,000 when the asset is returned to the lessor at the end of year 6 and the lessee believes that the asset will be worth $20,000 at the end of the lease term. The lessor used a 4% percent target rate of return. The accounting period for each com¬pany ends on December 31 and lease payments will be made beginning on January 1, 2018 and each year thereafter. Collectability of the lease payments is not an issue. Assume a marginal tax rate of 20%. REQUIRED: 1. Is this an operating or finance lease? Why? (Hint: you should determine this is a finance lease) 2. Calculate the lease payments. 3. Prepare the journal entries for the lessee & lessor for the first two years including any deferred tax entries. Assume the leased asset is returned to the lessor at the end of the lease term and is worth $75,000. 4. Prepare the balance sheet and income statement for the lessee & lessor as of December 31 for 2018. 5. Prepare the SCF for the lessee and lessor for the year ended 12/31/18 and 12/31/19 (using the indirect method for CF from Operating Activities). 6. Prepare the SCF for the lessee and lessor for the year ended 12/31/18 and 12/31/19 (using the direct method for CF from Operating Activities).

Expert Solution

Step by step

Solved in 4 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions