Giannis Corporation leases a building to Jabari, Inc. on January 1, 2020. The following facts pertain to the lease agreement.

1. The lease term is 10 years with equal annual rental payments of $3,449 at the end of each year.

2. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature.

3. The building has a fair value of $34,000, a book value to Giannis of $22,000, and a useful life of 15 years.

4. At the end of the lease term, Giannis and Jabari expect the residual value of the building to be $12,000, and this amount is guaranteed by Money, Inc., a third party.

5. Giannis wants to earn a 5% return on the lease, and collectibility of the payments is probable.

Instructions

a. Describe the nature of this lease to both Giannis and Jabari.

b. Assume the present value of lease payments and third-party guarantee is $34,000 and the rate of return to amortize the net lease receivable to zero is 13.24%. Prepare the amortization schedules Giannis would use to amortize the net lease receivable to zero.

c. Prepare the journal entries to record the entries for Giannis for 2020 and 2021.

d. Prepare the journal entries for Jabari (the lessee) for 2020 and 2021, assuming the rate implicit in the lease is known to Jabari.

e. Suppose the leased asset had a shorter economic life of 8 years, the lease agreement was only for 5 years, and the residual value of $12,000 guaranteed by Money, Inc. remained the same. Would the rate of return required to amortize the net lease receivable to zero increase, decrease, or stay the same? Explain.

f. Suppose, instead of Money, Inc., Jabari guarantees the residual value itself. How would this affect the classification of this lease agreement for both Giannis and Jabari? Describe the impact that any change in classification would have on revenue recognition for Giannis.