Flounder Corporation leased equipment to Shamrock, Inc. on January 1, 2020. The lease agreement called for annual rental payments of $1,082 at the beginning of each year of the 3-year lease. The equipment has an economic useful life of 7 years, a fair value of $8,100, a book value of $6,100, and Flounder expects a residual value of $5,600 at the end of the lease term. Flounder set the lease payments with the intent of earning a 4% return, though Shamrock is unaware of the rate implicit in the lease and has an incremental borrowing rate of 6%. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature.

Show all necessary journal entries for Shamrock in 2020.

Date Account Titles and Explanation Debit Credit

(a)

(b)

(To record the lease)

Date

(a)

(b)

(To record lease payment)

Date

(a)

(b)

(c)

How would the measurement of the lease liability and right-of-use asset be affected if, as a result of the lease contract, Shamrock was also required to pay $600 in commissions, prepay $800 in addition to the first rental payment, and pay $200 of insurance each year?

Lease liability: $

Right-of-use-asset $

Suppose, instead of a 3-year lease term, Shamrock and Flounder agree to a one-year lease with a payment of $1,082 at the start of the lease. Prepare necessary journal entry for Shamrock in 2020.

Date Account Titles and Explanation Debit Credit

1/1/20

(a)

(b)

Determine the nature of the lease to both Flounder and Shamrock.

The lease is a/an lease to Shamrock. Financing or Operating?

The lease is a/an lease to Flounder. Financing or Operating?