Chapter 18, Problem 18.14E

Finance Lease, Purchase Option, Lessee, Amortization Schedules, Journal

Entries. Carrie-Ann Fashions, Inc. entered into a 5-year lease with Reese Rentals to occupy an office building. The economic life of the building is 30 years. The building had a fair value of $8,500,000 and Carrie-Ann has an option to purchase the building at the end of the lease term for $5,500,000, which is expected to be considerably below fair value at lease termination. The annual lease payments are $842,500 and are due on January 1 with the first one due at lease commencement on January 1, 2019. The implicit rate in the lease is 6% and is known by Carrie-Ann. There is no guaranteed residual value specified. The lessor did not offer any incentives to sign the lease. Carrie-Ann did not incur any initial indirect costs. The lease commencement date is January 1. All payments are due on January 1.

Required

1. a. Classify this lease for Carne-Ann Fashions (the lessee).
2. b. Prepare the journal entries necessary to record this transaction on the lease commencement date.
3. c. Prepare the lease amortization schedule and prepare the journal entries for the first year.