Walden Company leases manufacturing equipment from Preston Rentals Co. on January 1, 2012. The following data pertain to the agreement:
· The term of the non-cancelable lease is three years with no renewal option. A payment of $78,443 is due on December 31 of each year.
· The fair value of the machine on January 1, 2012, is $300,000. This is the same amount that Preston paid for the machine on December 10th, 2011.
· The machine has a remaining economic life of 10 years, with no residual value.
· The machine reverts to the lessor upon termination of the lease.
· Walden guarantees a $100,000 residual value at the end of the lease term.
· Walden Corp. depreciates all machinery it owns on a straight-line basis.
· Walden's incremental borrowing rate is 8 percent per year. Walden does not have knowledge of the 5 percent implicit borrowing rate used by Preston.
· Collectability of the future lease payments is reasonably predictable, and no additional costs related to the lease are expected.
Required:
- What type of lease is this to Walden? Be specific and outline which criteria you used to justify your answer.
- Record the entries required on Walden's books for the inception of the lease on January 1, 2012.
- Record the entry on Walden's books on December 31, 2012, to record depreciation of the leased asset.