Accounting Intermediate: Chapter 15 Leases

Lowe Corporation enters into an agreement with Newlin Rentals Co. on January 1, 20x1 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement:

i. The term of the non-cancelable lease is 3 years with no renewal option. Payments of $194,016 are due on December 31 of each year.

ii. The fair value of the machine on January 1, 20x1, is $500,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. And, the equipment is not a specialized use item.

iii. Both Lowe and Newlin depreciates all machinery it owns on a straight-line basis, no residual.

iv. Lowe's incremental borrowing rate is 10% per year. Lowe does not have knowledge of the 8% implicit rate used by Newlin.

v. Assume Newlin considers collectability to be reasonably assured and has no material future costs associated with the lease.

10% factor = 2.48685 8% factor = 2.57710

a. What type of lease is this from Lowe Corporation's (lessee) viewpoint?

b. What type of lease is this from Newlin Rentals Co.(lessor) viewpoint?

c. Prepare journal entries for year 1 for both Lowe and Newlin,

d. Prepare journal entries for year 1 for both Lowe and Newlin assuming the lease is cancelable,collection is not reasonably assured, and there are material uncertain future costs.