Lease Problem
On January 1, 2016, Feldman Company enters into a noncancelable lease, with no renewal option, to lease a new piece of equipment from Cordova Leasing Company. The lease term is for three years and the lease payments are made on December 31 of each year. The equipment cost Cordova $250,000, it has a fair value of $300,000 and a useful life of 10 years with no residual value. The equipment reverts to Cordova upon termination of the lease. Feldman guarantees a $100,000 residual value at the end of the lease term. Feldman Company depreciates all machinery it owns on a straight-line basis. Feldman's incremental borrowing rate is 8 percent per year and Feldman Company does not have knowledge of the 5 percent implicit rate used by Cordova. Collectability of the future lease payments is reasonably predictable, and no additional costs related to the lease are expected.
Required:
1. Determine the annual lease payments, as set by the lessor.
2. Determine the amount of the minimum lease payments that will be capitalized by the lessee.
3. What type of lease is this to Feldman Company? Be specific in justifying your answer.
4. What type of lease is this to Cordova Company? Be specific in justifying your answer.
5. Prepare any necessary journal entries on January 1, 2016, for both parties.
6. Prepare any necessary journal entries on December 31, 2105 for both parties.
7. What is the amount of depreciation expense that will be recognized by the lessee? Be sure to show all calculations.