Chapter 18, Problem 18.7P

Classification as Finance or Operating Lease, Lessee. Lessor, Journal Entries, Discount Rates, Sales-Type Lease, Purchase Option. On May 1, 2018, Gia Equipment Manufacturers (GEM) agreed to lease nonspecialized machinery to Jason Associates GEM paid $2,000,000 to produce the machine and carries it at this amount in its inventory. The fair value (current selling price) of the machine is $2,104,317. The lease terms follow

• Annual rental payments of $345,000 are due beginning on May 1, 2018, and every year on May 1.
• The lease term is 8 years.
• There is a purchase option to acquire the asset at the end of 6 years for $700,000. It is reasonably certain that Jason Associates will exercise this purchase option
• The economic life of the asset is 10 years.
• The lessor's 9% implicit rate is known to Jason Associates.
• The lessee's incremental borrowing rate is 12%.
• Annual maintenance is $20,000, and annual training is $35,000. The lessee pays both December 31 to independent third parties and charges these payments to general and administrative expenses
• GEM indicates that collection of all lease payments is reasonably assured.
• Jason depreciates similar machinery that it owns using the straight-line method over 10 years. Jason's and GEM’S fiscal years end on December 31.

Required

1. a. Determine the lease classification for both the lessor and lessee.
2. b. Prepare the amortization table for the entire lease term.
3. c. Prepare the journal entries for the lessee during 2018.
4. d. Prepare the journal entries for the lessor during 2018.