Problem: Mike Macinski Leasing Company leases a new machine that has a cost and fair value of $95,000 to Sharrer Corporation on a 3-year noncancelable contract. Sharrer Corporation agrees to assume all risks of normal ownership including such costs as insurance, taxes, and maintenance. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2008. Mike Macinski Leasing Company expects to earn a 9% return on its investment. The annual rentals are payable on each December 31.
Instructions:
Q1. Discuss the nature of the lease arrangement and the accounting method that each party to the lease should apply.
Q2. Prepare an amortization schedule that would be suitable for both the lessor and the lessee and that covers all the years involved.