(L04) (Lessee Entries with Bargain-Purchase Option) The following facts pertain to a noncancelable lease agreement between Mooney Leasing Company and Rode Company, a lessee.

Inception date May 1, 2017 Annual lease payment due at the beginning of each year, beginning with May 1, 2017 $21,227.65 Bargain-purchase option price at end of lease term $ 4,000.00 Lease term 5 years Economic life of leased equipment 10 years Lessor’s cost $65,000.00 Fair value of asset at May 1, 2017 $91,000.00 Lessor’s implicit rate 10%

Lessee’s incremental borrowing rate 10%

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs.

Instructions

(Round all numbers to the nearest cent.)

(a) Discuss the nature of this lease to Rode Company.

(b) Discuss the nature of this lease to Mooney Leasing Company.

(c) Prepare a lease amortization schedule for Rode Company for the 5-year lease term.

(d) Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2017 and 2018. Rode’s annual accounting period ends on December 31.

Reversing entries are used by Rode.