Lessee Comapny enters into a lease agreement on July 1, 2010, for equipment. The following data are relevant to lease agreement.
1. The term of the non-cancelable lease is 10 years, with no renewal option. Payments of $120,000 are due on June 30 of each year.
2. The equipment has an economic life of 12 years.
3. Lessee depreciates similar machinery it owns on the sum-of-the-years'-digits basis.
4. The lessee pays all executory costs. The residual value of the equipment is expected to be $50,000, but not guaranteed.
5. Lessee's incremental borrowing rateis 15% per year.Lessee is aware that the lessor used an implicit rate of 12% in computing the lease payments.
Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor.
INSTRUCTIONS:
(a) Indicate the type of lease to the Lessee and Lessor.
(b) Prepare the journal entries on the books of lessee and lessor through December 31, 2011, and at the end of the lease assuming that the actual residual value was 1) $65,000 and 2)$40,000.
(c) Assuming that the residual value is guranteed, prepare the journal entries on the books of lessee and lessor through December 31, 2011, and at the end of the lease assuming that the actual residual value was 1) $65,000 and 2) $40,000.