Absolute Leasing, Inc. agrees to lease equipment to Allen, Inc. on January 1, 2012. They agree on the following terms:
1) The normal selling price of the equipment is $1,500,000 and the cost of the asset to Absolute Leasing, Inc. was $1,350,000.
2) At the end of the lease, the equipment will revert to Absolute Leasing, Inc. and have an unguaranteed residual value of $100,000. Their implicit interest rate is 10%.
3) The lease is noncancelable with no renewal option. The lease term is 10 years (the same as the estimated economic life).
4) Absolute Leasing, Inc. incurred costs of $9,000 in negotiating and closing the lease. There are no uncertainties regarding additionalcosts yet to be incurred and the collectability of the lease payments is reasonably predictable.
5) The lease begins on January 1, 2012 and payments will be in equal annual installments.
6) Allen will pay all maintenance, insurance, and tax costs directly and annual payments of $140,000 on January 1 of each year.
Required:
a) Determine what type of lease this would be for the lessee and calculate the initial obligation.
b) Prepare Allen, Inc.'s amortization schedule for the lease terms.
c) Prepare all the journal entries for Allen, Inc. for 2012. Assume a calendar year fiscal year.