Lessee and Lessor Accounting Issues
Response to the following problem:
Lessor Leasing Company agrees to provide Lessee Company with equipment under a noncancelable lease for five years. The equipment has a five-year life, cost Lessor Company $30,000, and will have no residual value when the lease term ends. Lessee Company agrees to pay all executory costs ($500 per year) throughout the lease period. On January 1, 2010 the equipment is delivered. Lessor expects a 14% return. The five equal annual rents are payable in advance starting January 1, 2010.
Required:
1. Assuming this is a direct financing lease for the lessor and a capital lease for the lessee, prepare a table summarizing the lease and interest payments suitable for use by either party.
2. On the assumption that both companies adjust and close books each December 31, prepare journal entries relating to the lease for both companies through December 31, 2010 based on data derived in the table. Assume that Lessee Company depreciates similar equipment by the straight-line method.