Question
On January 1, 2011, the Tadpole Company leased manufacturing equipment from the Frog Company. The following information about this lease is available:
Noncancelable term of the lease: 10 years, with no bargain purchase option
Economic life of equipment: 15 years
Fair value (cost to the lessor) of the equipment: $375,000
Lease payments, due at the end of each year: $55,000
Tadpole Company's incremental borrowing rate (The implicit rate is not known by Tadpole): 12%
Tadpole Company's depreciation method: straight-line
(a) From the lessee's perspective, what type of lease is this and why?
(b) What are the journal entries required for 2011 by the lessee?
(c) Assume the same facts as above, except that the amount of the yearly lease payments is $65,000 and the economic life of the equipment is 10 years. What type of lease is this and why?
(d) Assume the same facts as (c) above. What journal entries are required in 2011 by the lessee?
(e) Assume the same facts as (c) above. Prepare a partial balance sheet as of December 31, 2011 to show the relevant accounts and balances of this lease arrangement from the perspective of the lessee.