Concept explainers
Classification as Finance or Operating Lease, Lessor,
- Annual rental payments of $46,466 are due on January 1 of each year. These rental payments do not include any other lease components.
- Lease term is 7 years.
- There is a purchase option that is reasonably expected to be exercised to acquire the asset at the end of 5 years for $20,000.
- The lessor expects to recover the guaranteed residual value of $30,000 at the termination of the lease. The lessee guarantees the residual value.
- The economic life of the asset is 8 years.
- Sonata Company knows the lessor's implicit rate.
- The lessee's incremental borrowing rate is 12%.
- Annual maintenance is $8,000 and annual training is $9,500. The lessee pays both at the end of the year to an independent third party.
- LP indicates that the collection of the lease payments is reasonably assured and the recovery of the residual value is probable.
- Sonata
depreciates (amortizes) similar machinery that it owns using the straight-line method.
Required
- a. Compute the implicit rate.
- b. Classify this lease agreement for both the lessor and the lessee.
- c. Prepare an amortization table for the lease.
- d. Prepare the journal entries for the lessor and the lessee during the first year of the contract.
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