Problem:
On Jan 1, 2004, Haden company [ lessor] entered into a non-cancelable cancelable lease agreement with Sandy company[ lessee] for machinery was carried on the accounting records of Haden at $4,530,000 and had a market value of $4,800,000. Minimum lease payments under the lease agreement which expires on December 31, 2013 total $7,100,000. Payments of $710,000 are due each January 1. The first payment was made on January 1, 2004 when the lease agreement was finalized. The interest rate of 10 % which was stipulated in the lease agreement is the implicit rate set by the lessor. The effective interest method of amortization is being used. Sandy expects the machine to have a ten year life with no salvage value, and to be depreciated on as straight-line basic. Collectibility of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.
Instructions:
Q1. From the lessee's viewpoint. What kind of lease is the above agreement? Give reasons and supporting calculations.
Q2. From the lessor's viewpoint. What kind of lease is the above agreement? Give reasons and supporting calculations.
Q3. What should be the income before income taxes derived by Haden from the lease for the year ended December 31, 2004? Show supporting calculations
Q4. Ignoring income taxes, what should be the expenses incurred by Sandy from this lease for the year ended December 31, 2004? Show supporting calculations.
Q5. What journal entries should be recorded by Sandy company on January 1, 2004?
Q6. What journal entries should be recorded by Haden company on January 1?