Concept explainers
Classification as Finance or Operating Lease, Lessor,
- Annual rental payments of $263,516 are due on January 1 of each year. These payments do not include any executory costs.
- Lease term is 6 years.
- There is no purchase option.
- The lessor expects to recover the unguaranteed residual value of $280,000 at the termination of the lease.
- The economic life of the asset is 7 years.
- The lessor s implicit rate is known to Ward Construction.
- Annual maintenance is $20,000, and annual property tax is $12,500. The lessee pays both on January 1 of the year to the lessor. The property taxes are included in the payment made by the lessee to the lessor.
- The lessor has no material uncertainties regarding future costs to be incurred under the lease, and collectability of lease payments is reasonably assured.
- Ward
depreciates similar machinery that it owns using the straight-line method. - The fiscal year ends on December 31 for both companies.
Required
- a. Determine the implicit rate.
- b. Determine the lease classification for both the lessor and the lessee.
- c. Prepare the amortization table for the entire lease term for the lessor.
- d. Prepare the amortization table for the entire lease term for the lessee.
- e. Prepare the lessee’s journal entries required for each year of the lease term assuming that the equipment is returned with a fair value of $280,000.
- f. Prepare the lessor's journal entries required for each year of the lease term assuming that the equipment is returned with a fair value of $280,000.

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