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ACB, leases its ice cream making equipment from Lease Easy Company under the following lease terms: *The lease term is five years, non-cancellable, and requires
ACB, leases its ice cream making equipment from Lease Easy Company under the following lease terms:
*The lease term is five years, non-cancellable, and requires equal rental payments of $56,926 due at the beginning of each year starting January 1, 2019.
*Upon inception of the lease on January 1, 2019, Lease Easy purchased the equipment at its fair value of $280,000 and immediately transferred it to AB. The equipment has an estimated econorfic life of five years, and a $15,000 residual
value that is guaranteed by ACB.
The lease contains no renewal options, and the equipment reverts to Lease Easy Company upon termination of the lease.
AC's incremental borrowing rate is 5%; the rate implicit in the lease is also 4.2%. The implicit rate in the lease is not readily determinable by ACB.
AC depreciates similar equipment that it owns on a straight-line basis.
Both companies have December 31 year-ends.
Both companies follow ASPE.
Required:
a.Evaluate how the lessee should account for the lease transaction
b.Calculate the Present Value of the lease
c.Prepare the lessee's amortization schedule for this lease.
d.Prepare the journal entries on January 1, 2019, December 31, 2019, and January 1, 2020 for the lessee.
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