On January 1, 2016, Moorecraft Finance Company agreed to lease a piece of machinery o Ward Construction Products, Inc. Moorecraft paid $ 1,554,516 to acquire the machine from the manufacturer and carries it at this amount in its financial statements. The fair value (current selling price) of the machine is $ 1,554,516. The relevant lease terms are listed below.
• Annual rental payments of $ 276,016 are due at the beginning of each year. These are the minimum rental payments and do not include any executory costs.
• Lease term is six years.
• There is no bargain purchase option.
• The lessor expects to recover the unguaranteed residual value of $ 280,000 at the termination of the lease.
• The economic life of the asset is seven years.
• The lessor’s 8% implicit rate is known to Ward Construction Products, Inc.
• The lessee’s incremental borrowing rate is 10%.
• Annual maintenance is $ 20,000 and annual property tax is $ 12,500. The lessee pays both at the end of the year and classifies these costs as general and administrative expenses.
• The lessor has no material uncertainties regarding future costs to be incurred under the lease and collectability is reasonably assured.
• Ward depreciates similar machinery owned using the straight- line method.
Required
a. Determine if this is an operating or a capital lease for both the lessor and the lessee.
b. Prepare the amortization table for the entire lease term for the lessor.
c. Prepare the amortization table for the entire lease term for the lessee.
d. Prepare the lessee’s journal entries required for each year of the lease term assuming that the equipment is returned with a fair value of $ 280,000.
e. Prepare the lessor’s journal entries required for each year of the lease term assuming that the equipment is returned with a fair value of $ 280,000.