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Assume that on December 31, 2021, A Company signs a 4-year, non-cancelable lease agreement to lease equipment from B Corp. The following information pertains to
Assume that on December 31, 2021, A Company signs a 4-year, non-cancelable lease agreement to lease equipment from B Corp. The following information pertains to this lease agreement.
- The agreement requires equal rental payments of $90,000 beginning on December 31, 2021.
- The fair value of the equipment on December 31, 2021, is $322,012.
- The equipment has an estimated economic life of 5-years. Additionally, there is an unguaranteed residual value of $12,000 at the end of the lease term.
- The lease is nonrenewable. At the termination of the lease, the equipment reverts to the lessor.
- B's implicit rate is 10% but this is not known by A. A's incremental borrowing rate is 12%.
What type of lease is this for A Company? Explain.
Prepare the journal entries on A's books to reflect the signing of the lease agreement and to record the cash payments and expenses related to this lease for the years 2021 and 2022.
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