$1.($LESSEE ENTRIES FOR FINANCING LEASE$).$

The following facts pertain to a non$-$cancelable lease agreement between Ace Leasing Company and King Company, a lessee.

Commencement of Lease Date January $1,2025$

Annual lease payment due at the beginning of the year

beginning with January $1,2025$ $$137,171$

Residual value of equipment at end of lease term,

guaranteed by lessee $$54,000$

Expected residual of equipment that will need to be paid in cash

at end of lease term $$49,000$

Lease term $6$ years

Economic life of leased equipment $7$ years

Fair Value of asset at January $1,2025$ $$659,000$

Lessor$$s Implicit Rate $12\%$

Lessee$$s incremental borrowing rate $12\%$

The asset will revert to the lessor at the end of the lease term.

A$.$ Is this an operating or financing lease to the Lessee? Explain.

B$.$ Compute the Lease Liability to be recorded by the Lessee at inception of the lease and compute the ROU Asset to be recorded by the Lessee at inception. Based on those complete the two Lessee entries $1/1/2025.$

C$.$ Prepare an interest amortization table for the first two periods and prepare the related two entries at year$-$ends $2025$ and $2026.$

D$.$ Compute the ROU Asset Amortization for the first two periods and prepare the related two entries at year$-$ends $2025$ and $2026.$

$2.($LESSEE ENTRIES FOR AN OPERATING LEASE$).$

Assume that Ace Leasing Company and King Company, a lessee, agreed to the lease shown below instead on the one shown in problem $1.$

Commencement of Lease Date January $1,2025$

Annual lease payment due at the beginning of the year

beginning with January $1,2025$ $$137,171$

Lease term $6$ years

Economic life of leased equipment $10$ years

Fair Value of asset at January $1,2025$ $$950,000$

Lessor$$s Implicit Rate $12\%$

Lessee$$s incremental borrowing rate $12\%$

The asset will revert to the lessor at the end of the lease term. The lessee uses straight$-$line amortization for all leased equipment.

A$.$ Is this an operating or financing lease to the Lessee? Explain.

B$.$ Compute the Lease Liability to be recorded by the Lessee at inception of the lease and compute the ROU Asset to be recorded by the Lessee at inception. Based on those complete the two Lessee entries $1/1/2025.$

C$.$ Compute the yearly Lease Expense on King Company financial statements.

D$.$ Compute the Interest Expense for the first two years.

E$.$ Compute the ROU Asset Amortization for the first two years.

F$.$ Prepare the remaining entries for December $31,2025($the end of the first year$).$