Chapter 21 - Homework #1 ABC Company, as lessee, enters into a lease agreement on January 1, 2017, to lease equipment. The following data are relevant to the lease agreement. The term of the noncancellable lease is three years, with no renewal option. Payments of $16,000 are due on January 1, of each year. The fair value of the equipment on January 1, 2017 is $50,000. The equipment has an estimated economic life of five years, and an estimated residual value of $0. - The equipment reverts back to the lessor at the termination of the lease and is expected to have use to the lessor. The lessee is aware that the lessor used an implicit rate of 4%. Instructions: 1. Indicate the type of lease ABC has entered into 2. Prepare the journal entries on ABC's books related to the lease agreement for the following dates: (round all amounts to the nearest dollar. Include a partial amortization schedule) a. January 1, 2017 b. December 31, 2017 C. January 1, 2018 M K G H A B C D E 1 Capital Lepase Criteria 2 3 Is the lease agreement Long-term and non-cancellable? 4 5 Finance Capital Lease Criteria 6 7 1. Transfer Ownership 8 9 2. Contain a Bargain Purchase Option? 10 11 3. 75% Lease term test 12 Lease term > 75% of economic life 13 14 15 4. Present value test 16 Present value of minimum lease payments > 90% of fair value of asset 17 1/1/17 1/1/18 1/1/19 MLP's include - required rent -bargain purchase -guaranteed residual value -penalty for non renewal 0 0 0 18 19 20 5. Alternative use for lessor 21 no 22 23 24 25 26 27 28 29 30 31 criteria ABC Schedule Sheet3 Ready D C E A B Lease liability Right of use asset 1 2 D 3 ABC Lease Amortization Schedule A B C Lease Interest Decrease Payment Liability CR. Cash Dr. Liability 4 Balance Lease Liability 5 6 Date 7 8 9 1/1/2017 1/1/2017 1/1/2018 1/1/2019 Amortization expense interest expense 10 11 12 13 14 1/1/17 15 16 17 1/1/17 18 19 20 12/31/17 21 22 23 24 25 1/1/18 26 criteria ABC Schedule Sheet3 PE