Question
Flawed Engagement Rings, Ltd. (FER)as lessee, enters into a lease agreement on January 1, 2019 to lease diamond polishing equipment from R&R Jewelers. The terms
Flawed Engagement Rings, Ltd. (FER)as lessee, enters into a lease agreement on January 1, 2019 to lease diamond polishing equipment from R&R Jewelers. The terms of the lease are presented below:
i. The term of the lease is 7 years, with no renewal option.The seven annual lease payments of $171,750 made at the beginning of each year.
ii. The fair value of the equipment at January 1, 2019 is$1,022,400.The equipment has an economic life of 10 years with no salvage value. The cost of the equipment to the lessor, R&R Jewelers, is $1,000,000.
iii. FER depreciates similar equipment it owns on a straight-line basis over the economic life of the property.
iv. FER's incremental borrowing rate is 12% and the lessor's implicit rate in the lease is 10% and is known to FER.
v. There are no initial direct costs related to this lease.
vi. Collection of the lease payments is probable.
vii. FER has the option to purchase the equipment for $200,000 at the end of the lease term
REQUIRED: Assuming that the present value of the lease payments is equal to $1,022,400
(a)Provide justification that this is a finance lease for the lessee (Test All Criteria).
(b)Prepare amortization table for 2019 and 2020 using the effective interest rate method of amortization.
(c)Prepare all of FER's journal entries for 2019.
(d)Classify this lease for the lessor. Justify your answer.
(e)Prepare the journal entries required for R&R Jewelers in 2019.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started