Macinski Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of $70,000 and fair value of $95,000. Under the 3-year, non-cancelable contract, Sharrer will receive title to the machine at the end of the lease. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2020. Macinski expects to earn an 8% return on its investment, and this implicit rate is known by Sharrer. The annual rentals are payable on each December 31, beginning December 31, 2020.

Instructions

a. Discuss the nature of the lease arrangement and the accounting method that each party to the lease should apply.

b. Prepare an amortization schedule that would be suitable for both the lessor and the lessee and that covers all the years involved.

c. Prepare the journal entry at commencement of the lease for Macinski.

d. Prepare the journal entry at commencement of the lease for Sharrer.

e. Prepare the journal entry at commencement of the lease for Sharrer, assuming (1) Sharrer does not know Macinski’s implicit rate (Sharrer’s incremental borrowing rate is 9%), and (2) Sharrer incurs initial directs costs of $10,000.