Example 3

Lily Leasing entered into an agreement to lease automated equipment from Marshall Manufacturing on December 31, 2022. Marshall manufactured the equipment at a cost of $450,000.

Lease Description:

Annual lease payments $84,591 - beginning of lease

Lease term 8 years

Economic life of asset 8 years

Implicit interest rate (known to lessee) 8%

	8%
PV of an annuity due; n = 8	6.20637
PV of ordinary annuity; n = 8	5.74664

Required:

Identify the type of lease arrangement for both the lessee and lessor.

Prepare the journal entry or entries to record the transaction on December 31, 2022, on the books of Lily Leasing.

Prepare the journal entry or entries to record the transaction on December 31, 2022, on the books of Marshall Manufacturing.

Prepare the journal entries for both the lessee and lessor to record interest expense (revenue) at December 31, 2023.