Problem
A lessor and a lessee signed a lease agreement that qualifies as a finance/sales-type lease and calls for annual lease payments of $26,269 over a six-year lease term. The asset's estimated useful life is also six years. The first payment is due on January 1st, which is the beginning of the lease. The interest rate is 5%. Based on these facts, the present value of the lease payments (which are equal to the value of the asset to the lessor) has been determined to be $140,000.
Task
A. For both the lessor and the lessee, prepare the journal entries necessary at the time of lease signing.
B. For both the lessor and the lessee, prepare the journal entries necessary at the first lease payment (January 1st).
C. For both the lessor and the lessee, prepare the journal entries necessary at the second lease payment (December 31st).
D. For the lessee, only, prepare the entry necessary to "depreciate" the right-of-use asset (hint: depreciation under a finance lease is referred to as amortization).
E. Why doesn't the lessor have to depreciate the asset?