Question
(b) The information below relates to a leasing arrangement between Simmonds Leasing Company and Telsan Company, a lessee. Inception date January 1, 2020 Lease term
(b) The information below relates to a leasing arrangement between Simmonds Leasing Company and Telsan Company, a lessee.
Inception date January 1, 2020
Lease term 6 years
Annual lease payment due at the beginning of each year, beginning with January 1, 2020 $150,000
Fair value of asset at January 1, 2020 $760,000
Economic life of leased equipment 7 years
Residual value of equipment at end of lease term, guaranteed by the lessee $65,500
Lessors implicit rate 10%
Lessees incremental borrowing rate 12%
January 1, 2020
The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $65,500. The lessee uses the straight-line depreciation method for all equipment.
Instructions (i) What is the lease liability for Telsan Company? (4 marks) (ii) Record the lease on Telsan Companys books at the date of inception. (4 marks) (iii)Record the first years depreciation on Telsan Companys books. (3 marks) (iv) Record interest expense and lease liability for Telsan Company for the year ending December 31, 2020. (2 marks) (v) Discuss the nature of this lease to Simmonds Leasing Company. (3 marks)
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