Klene Manufacturing CO. leased a piece of nonspecialized machinery for use in its operations from Kelly Leasing on Jan 1.

The 11 year lease requires lease payments of $4500 due on Jan 1 of each year. The machinery is estimated to have a 11 year life, is depreciated on the straight line method, and will have no residual value at the end of the lease term. The present value of the lease payments using 12.5% and the assets fair value on the date the lease is signed both equal $29414. Kelly paid $19000 to acquire the equipment. The lessors implicit rate of 12.5% is known to Klene. Collection of all the lease payments is reasonable assured.

Begin by classifying the lease agreement for Kelly Leasing. identify any of the Group I criteria that Kelly meets.

Identify any Group II criteria that Kelly Leasing meets.

Prepare the entry for Kelly at the commencement of the lease on Jan 1. Exclude first annual lease payment from this entry.

Prepare the entry for the annual lease payment recreived on Jan 1.

Record Kellys interest revenue related to the lease on Dec 31.