Problem - Randall Company leases manufacturing equipment from Kissack Rentals Co. on January 1, 2014. The following data pertain to the agreement:
- The term of the non-cancelable lease is three years with no renewal option. A payment of $78,443 is due on December 31 of each year.
- The fair value of the machine on January 1, 2014, is $300,000. This is the same amount that Kissack paid for the machine on December 10th, 2013.
- The machine has a remaining economic life of 10 years, with no residual value.
- The machine reverts to the lessor upon termination of the lease.
- Randall guarantees a $100,000 residual value at the end of the lease term.
- Randall Corp. depreciates all machinery it owns on a straight-line basis.
- Randall's incremental borrowing rate is 8 percent per year. Randall does not have knowledge of the 5 percent implicit borrowing rate used by Kissack.
- Collectability of the future lease payments is reasonably predictable, and no additional costs related to the lease are expected.
Required:
1. What type of lease is this to Randall? Be specific and outline which criteria you used to justify your answer.
2. Record the entries required on Randall's books for the inception of the lease on January 1, 2014.
3. Record the entry on Randall's books on December 31, 2014, to record depreciation of the leased asset.
4. Record the first lease payment on Randall's books.
5. What type of lease is this for Kissack? Be specific and outline which criteria you used to justify your answer.
6. Record the entries required on Kissack's books for the inception of the lease on January 1, 2014.
7. Record all entries necessary at the time of receipt of the first lease payment on Kissack Rental's books.