On 5/1/16, Mr.Speakers enters into a lease for computer equipment. Mr.Speakers leases five, 27” iMacs with 5k Retina displays, the 3.5ghz quad core chipset and advanced graphics capabilities. The iMacs retail for $2,300 apiece. The lease specifies monthly payments of $335 for two years. The lease is renewable after two years and includes a computer upgrade at that time. However, the renewal option is not considered a “bargain” nor is there a bargain purchase option. Ownership of the computers never transfers to Mr.Speakers. The lessor has an implicit interest rate of 2%, which is known to Mr.Speakers, and the computers have a useful life of five years. Mr.Speakers’ incremental borrowing rate is 3%. Prepare ALL necessary journal entries for this lease for the year ending 12/31/16.
On 7/1/2016, Mr.Speakers enters into a lease for retail space. The leased building has a fair value of $500,000 and a useful life of 30 years. Mr.Speakers’ incremental borrowing rate is 3%. The implicit rate used by the lessor is 4%. There is a bargain purchase option ($20,000) included in the lease, which is non-cancellable and ends after ten years. Lease payments occur quarterly beginning on 7/1/2016. Mr.Speakers is responsible for all executory costs, which include $1,200 of insurance and $1,500 of taxes. Insurance premiums are paid in advance on 7/1 each year. Taxes are paid on 12/31 each year. Calculate the required lease payment if the lessor wishes to recover 100% of the fair value of the building. Prepare ALL of Mr.Speakers’ journal entries related to the lease for the year ended 12/31/2016.