Lease facts:

$$ Date of lease $7/1/21$

$$ Term $3$ years $($expires $7/1/24)$

$$ Semi$-$annual lease payments of $$150,000$ every $7/1$ and $1/1$

$$ Lessee$$s incremental borrowing rate $5\%$

$$ Lessor$$s implicit rate of return $4\%($NOT known to lessee$)$

$$ Lessor$$s cost of asset leased $-$ $$600,000$

$$ Guaranteed residual value $-$ $$100,000($lessee believes fair value of the asset at the end of the lease will be greater than $$100,000).$

$$ Lessee and Lessor both have a December $31$st yearend.

Requirements:

$1.$ Assume the lease is treated as a finance lease:

a$.$ Determine the present value of the lease payments

b$.$ Prepare an amortization table for the lease payments for the lessee

c$.$ Prepare all of the lessee$$s required journal entries for $2021$ and $2022$

d$.$ Determine the fair value of the lease from the lessor$$s perspective

e$.$ Prepare the lessor$$s amortization table for this lease

f$.$ Prepare all of the lessor$$s required journal entries for $2021$ and $2022$

$2.$ Assume the lease is treated as an operating lease:

a$.$ Prepare a table similar to the one distributed in class showing the $$interest$$ and $$depreciation$$ portions of annual lease expense for each year of the lease.

b$.$ Prepare all of the lessee$$s required journal entries for $2021$ and $2022$

c$.$ Prepare all of the lessor$$s required journal entries for $2021$ and $2022$

$3.$ Using your work in the first two parts, complete the tables provided in the excel file to summarize the financial reporting for the lessee and the lessor.

$4.$ Assume the lease qualifies as a finance lease and the lessee believes that the fair value of the asset on $7/1/24$ will be $$40,000$

a$.$ Prepare a modified amortization table for the lease for the lessee

b$.$ Prepare journal entries on $7/1/24$ for both the lessee and lessor assuming the actual fair value at the end of the lease is:

i$.$ $$30,000$

ii$.$ $$40,000$

iii. $$120,000$