The following facts pertain to a noncancelable lease agreement between Earth Leasing Corporation and New Moon Company, a lessee.
• Inception date is October 1, 2012
• Annual lease payment due at the beginning of each year, beginning with October 1, 2012, is $31,416.
• Bargain purchase option price at end of lease term is $5,000.
• Lease term 6 years.
• Economic life of leased equipment 12 years
• Lessor's cost $120,000.
• Fair value of asset at October 1, 2012 is $160,000.
• Lessor's implicit rate (not known by lessee) is 8%
• Lessee's incremental borrowing rate 6%.
• The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs, which total $10,000 per year.
Answer the following questions in complete sentences where applicable, and show all computations.
a) Determine and concisely but explicitly explain the type of lease this is to New Moon.
b) Determine and concisely but explicitly explain the type of lease this is to Earth Leasing.
c) Determine the amounts related to the lease that must be reported on the income statement and the classified balance sheet for New Moon as of and for the fiscal year ended December 31, 2012.
d) Determine the amounts related to the lease that must be reported on the income statement and the classified balance sheet for Earth Leasing as of and for the fiscal year ended December 31, 2012.