Retype this page word for word. Commencement date jan 1 2017 Annual lease paymen

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Retype this page word for word. Commencement date jan 1 2017 Annual lease payment due at beginning of year (start jan 1 2017) Residual value of equipment at end of lease term guaranteed by lessee Expected residual value of equipment at end of lease term Lease ternm Economic life of leased equipment Fair value of asset at January Lessor's implicit rate Lessee's incremental borrowing rate Revert to lessor at end of lease term lessee uses straight line 113,864 50,000 45,000 6 years 6 years 600,000 8%6% 8% Since the guaranteed residual value is $50,000 and the expected residual value is $45.000, the expected payment of residual value at the end of lease term would be $5,000 (2) Lessor's implicit rate (8%) is known to the lessee (3) Lessee's incremental borrowing rate is 6%, not 8% (4) Assume that there is an altermative use to the lessor at the end of lease term (1) [1] Describe the nature of the lease to the lessee. So, Finance lease or Operating lease. Please show all 5 classification criteria and determine if each of the 5 criteria is met or not [2] Prepare the journal entry on only January 1, 2017 1) This is a finance lease part 1 is satisfied and at least one of the following requirements were alsco met. a. Part 1-you can not cancel the lease- requirement met b. The Ownership transfers-not met c. Contains bargain/purchase option - not met d. Lease term is major portion of remaining economic life-6years/6years>75% remaining life requirement met Guaranteed residual value + sum of payments exceed fair value substantially (>90%- use the 8% rate the lessee knows is used-payment on first day of each period so annuity due-S 113,864·4.99271+ 50000..63017. S68,400.06. 31,508so-599.908.56 >90%"600,000 Requirement met e. f. Asset has no use to lessor at the end of lease term- not met lessor has a use Journal entry - lease payments present value + amount expected to be paid for guaranteed 2) residual value. (568,400.06+[50,000-450001 63017-$571,550.91) 571,550.91 a. Right of Use Asset i. Lease Liability 571,550.91

Explanation / Answer

Commencement date jan 2017

Reveri to lessor at end of lease term lessee uses straight line

Solution:-

1) This is a finance lease part 1 is satisfied and at least one of the following requirements were also met.

a. Part 1 - you can not cancle the lease - requirement met.

b. The onwership transfers - not met.

c. Contains bargain/purchase option - not met

d. Lease term is major portion of remaining economic life - 6years/6years>75% remaining life requirement met

e. Guranteed residual value + sum of payments exceed fair value substantially (>90%) - use the 8% rate the lessee knows is used- payment on first day of each period so annuity due- $113,864*4.99271 + 50000*.63017=568,400.04+31,508.50=599,908.56>90%*600,000 Requirement met

f. Asset has no use to lessor at the end of lease term-not met lessor has a use

2) Journal entry = lease payments present value + amount expected to be paid for guaranteed residual value. (568,400.06 + [50,000-45,000]*.63017=$571,550.91)

a. Right to use Asset 571,550.91

i. Lease Liability 571,550.91

Please Rate.

Annual lease payment due at beginning of year (start jan 1 2017) 113,864 Residual value of equipment at end of lease term guaranteed by lessee 50,000 Expected residual value of equipment at end of lease term 45,000 Lease term 6 years Economic life of leased equipment 6 years Fair value of asset at January 600,000 Lessor's implicit rate 8%-6% Lessee's Incremental borrowing rate 8%

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