Allied Industries manufactures high-performance conveyers that often are leased to industrial customers. On December 31, 2011, Allied leased a conveyer to Poole Carrier Corporation for a three-year period ending December 31, 2014, at which time possession of the leased asset will revert back to Allied. Equal payments under the lease are $200,000 and are due on December 31 of each year. The first payment was made on December 31, 2011. Collectibility of the remaining lease payments is reasonably assured, and Allied has no material cost uncertainties. The conveyer cost $450,000 to manufacture and has an expected useful life of six years. Its normal sales price is $659,805. The expected residual value of $150,000 at December 31, 2014, is guaranteed by United Assurance Group. Poole Carrier's incremental borrowing rate and the interest rate implicit in the lease payments are 10%.
Required:
1. Show how Allied Industries calculated the $200,000 annual lease payments.
2. How should this lease be classified (a) by Allied (the lessor) and (b) by Poole (the lessee)? Why?
3. Prepare the appropriate entries for both Poole and Allied on December 31, 2011.
4. Prepare an amortization schedule(s) describing the pattern of interest over the lease term.
5. Prepare the appropriate entries for both Poole and Allied on December 31, 2012, 2013, and 2014, assuming the conveyer is returned to Allied at the end of the lease and the actual residual value on that date is $105,000.