Accounting for Leases $($Lessee$)$

Earth, Inc. $($lessor$)$ and Moon Colony $2($MC$2,$ lessee$)$ signed a $30-$year non$-$cancelable lease for sky$-$projection equipment on December $27,2399.$ The lease agreement has a January $1,2400$ commencement date and the following details:

$1.$ The projection equipment has an estimated economic life of $42$ years.

$2.$ Earth, Inc. routinely leases this type of projection equipment to space colonies.

$3.$ The annual lease payment is $$168,500,$ payable starting January $1,2400$ and ending with a final payment on January $1,2429($for a total of $30$ annual payments$).$ MC$2($lessee$)$ made the first payment prior to commencement of the lease on December $28,2399.$

$4.$ The fair value of the projection equipment at lease commencement is $$2,800,000.$

$5.$ The lease does not contain a renewal or purchase option, and the asset reverts to Earth, Inc. at the end of the $30-$year lease period.

$6.$ The lease includes a guaranteed residual value clause, whereby MC$2($lessee$)$ guarantees the asset will be worth at least $$210,000$ at the end of the lease term. MC$2$ expects the asset to be worth only $$195,000$ at the end of the lease term.

$7.$ The rate implicit in the lease $($which is known to the lessee$)$ is $6\%.$ MC$2$s incremental borrowing rate is $7\%.$

$8.$ MC$2$ is a calendar year$-$end space colony.

$9.$ MC$2$ was awarded a lease incentive payment of $$42,000$ to execute the lease, which they received in cash on December $27,2399.$

Required $($from the lessee$$s$,$ MC$2)$ perspective:

a$.$ Determine the appropriate lease classification.

b$.$ Record the entries required in December $2399($if any$)$ for this lease.

c$.$ Calculate the lease liability and the right$-$of$-$use asset at lease commencement.

d$.$ Prepare MC$2$s journal entries for $2400($first full year of the lease$).$

e$.$ Prepare MC$2$s journal entries for $2401($second year of the lease$).$

f$.$ Prepare MC$2$s journal entries for $2429($final year of the lease$),$ assuming that the asset is worth $$198,000$ at the end of the lease term.