Problem: Tony Tiger, as lessee, enters into a lease agreement on May 1, 2017, for a tiger costume with Costume Inc. The following data are relevant to the lease agreement:
- The term of the noncancelable lease is 10 years, with no renewal option. Payments of $138,990 are due at the beginning of each year, starting today.
- The fair value of the costume is $1,000,000 (it's a pretty unique costume). The costume has an economic life of 13 years with no salvage value.
- Tony Tiger depreciates similar costumes on a straight-line basis.
- $1,000 Executory costs are paid by the lessee on an annual basis, of which are included in the above rent payment to the lessor.
- Tony Tiger's incremental borrowing rate is 8% per year and the implicit rate is unknown.
Required:
(a) Indicate the type of lease Tony Tiger (lessee) has entered into.
(b) Prepare a partial amortization schedule for the lessee that goes up to 5/1/19.
(c) Prepare the journal entries on Tony Tiger's books that relate to the lease agreement for the following dates: 5/1/17 (2 JE's), 12/31/17 (2 JE's), and 5/1/18 (1 JE)
(d) Prepare the journal entries on Costume Inc's books that relate to the lease agreement for the following date: 5/1/17 (2 JE's)
Attachment:- PROBLEM.rar