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Earth, Inc. ( lessor ) and Moon Colony 2 ( MC 2 , lessee ) signed a 3 0 - year non - cancelable lease
Earth, Inc. lessor and Moon Colony MC lessee signed a year noncancelable lease for skyprojection equipment on December The lease agreement has a January commencement date and the following details:
The projection equipment has an estimated economic life of years.
Earth, Inc. routinely leases this type of projection equipment to space colonies.
The annual lease payment is $ payable starting January and ending with a final payment on January for a total of annual payments MClessee made the first payment prior to commencement of the lease on December
The fair value of the projection equipment at lease commencement is $
The lease does not contain a renewal or purchase option, and the asset reverts to Earth, Inc. at the end of the year lease period.
The lease includes a guaranteed residual value clause, whereby MClessee guarantees the asset will be worth at least $ at the end of the lease term. MC expects the asset to be worth only $ at the end of the lease term.
The rate implicit in the lease which is known to the lessee is MCs incremental borrowing rate is
MC is a calendar yearend space colony.
MC was awarded a lease incentive payment of $ to execute the lease, which they received in cash on December
Required from the lessees MC perspective:
a Determine the appropriate lease classification.
b Record the entries required in December if any for this lease.
c Calculate the lease liability and the rightofuse asset at lease commencement.
d Prepare MCs journal entries for first full year of the lease
e Prepare MCs journal entries for second year of the lease
f Prepare MCs journal entries for final year of the lease assuming that the asset is worth $ at the end of the lease term.
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