On January 1, 2019, Archibald Inc. (seller-lessee) sold a cargo ship to MacPherson Capital (buyer-lessor) for its fair value of $24,000,000 and immediately leased it back under a 10-year non-cancellable lease at $2,250,758 per year, first payable on the commencement date of the lease. Archibald must return the asset to the buyer-lessor at the end of the lease term. The expected residual guarantee at the end of the lease term of $16,600,000 is not guaranteed. The ship has a remaining useful life of 20 years and its expected residual value at the end of its useful life is $0. Archibald is able to readily determine the 8% interest rate implicit in the lease. The ship had a gross carrying value of $30,000,000 and accumulated depreciation of $10,000,000 on Archibald’s books. Both companies have a December 31 year end and both companies depreciate this type of asset on a straight-line basis. 

Required:

a. Evaluate how the buyer-lessor (MacPherson) should account for the lease transaction. 

b. Prepare the journal entries on January 1, 2019, December 31, 2019, and January 1, 2020, for MacPherson, the buyer-lessor. 

c. Evaluate how the seller-lessee (Archibald) should account for the lease transaction. 

d. Determine the value of the ROU asset and lease liability at initial recognition for Archibald, the seller-lessee. 

e. Prepare the journal entries on January 1, 2019, December 31, 2019, and January 1, 2020, for Archibald, the seller-lessee.