Lessee Accounting for Operating Lease with Payments Made at End of Year

On January $1,$ Year $1,$ Hawk Corp. signs a contract to lease non$-$specialized manufacturing equipment from Falcon, Inc. Hawk agrees to make lease payments of $$36,000$ per year. Additional information pertaining to the lease is as follows:

The term of the noncancelable lease is $4$ years. Payments are due every December $31,$ beginning December $31,$ Year $1.$ Falcon expects to collect all lease payments.

The fair value of the manufacturing equipment on January $1,$ Year $1,$ is $$150,000.$ The equipment has an economic life of $7$ years.

The equipment has an estimated residual value of $$15,000$ at the end of the lease term. This amount is not guaranteed by Hawk.

Both Hawk and Falcon depreciate similar assets using the straight$-$line method.

Hawk's incremental borrowing rate is $8\%$ per year; Falcon$$s implicit interest rate is $6\%$ and known by Hawk.

Hawk pays $$1,100$ per year for maintenance of the equipment directly to an applicable third party.

Required:

$1.$ Examine and evaluate the lease classification criteria.

Criteria Met

$1.$ Transfer of ownership at end of lease

No

$2.$ Bargain purchase option

No

$3.$ Lease term is for a major part of its economic life

No

$4.$ Present value of lease payments and any guaranteed residual value equals or exceeds substantially all of the fair value

No

$5.$ Specialized nature of the asset

No

Determine what type of lease this is for Hawk.

Operating lease

$2($a$).$ Prepare a table summarizing the lease payments and operating expense. If an amount box does not require an entry, leave it blank. Round your answers to the nearest cent.

Concord Corp.

Summary Table of Lease Payments and Interest Expense

Year $1-$ Year $4$

Annual

Lease

Payment Interest at

$6\%$ on Unpaid

Liability Balance of

Lease

Liability

Jan. $1,$ Year $1$ $fill in the blank b$8925$bf$83$f$8$bf$99\_1$

$0$

$fill in the blank b$8925$bf$83$f$8$bf$99\_2$

$0$

$fill in the blank b$8925$bf$83$f$8$bf$99\_3$

Dec. $31,$ Year $1$ fill in the blank b$8925$bf$83$f$8$bf$99\_4$

$0$

fill in the blank b$8925$bf$83$f$8$bf$99\_5$

fill in the blank b$8925$bf$83$f$8$bf$99\_6$

Dec. $31,$ Year $1$ fill in the blank b$8925$bf$83$f$8$bf$99\_7$

$36,000$

fill in the blank b$8925$bf$83$f$8$bf$99\_8$

$0$

fill in the blank b$8925$bf$83$f$8$bf$99\_9$

Dec. $31,$ Year $2$ fill in the blank b$8925$bf$83$f$8$bf$99\_10$

$0$

fill in the blank b$8925$bf$83$f$8$bf$99\_11$

fill in the blank b$8925$bf$83$f$8$bf$99\_12$

Dec. $31,$ Year $2$ fill in the blank b$8925$bf$83$f$8$bf$99\_13$

$36,000$

fill in the blank b$8925$bf$83$f$8$bf$99\_14$

$0$

fill in the blank b$8925$bf$83$f$8$bf$99\_15$

Dec. $31,$ Year $3$ fill in the blank b$8925$bf$83$f$8$bf$99\_16$

$0$

fill in the blank b$8925$bf$83$f$8$bf$99\_17$

fill in the blank b$8925$bf$83$f$8$bf$99\_18$

Dec. $31,$ Year $3$ fill in the blank b$8925$bf$83$f$8$bf$99\_19$

$36,000$

fill in the blank b$8925$bf$83$f$8$bf$99\_20$

$0$

fill in the blank b$8925$bf$83$f$8$bf$99\_21$

Dec. $31,$ Year $4$ fill in the blank b$8925$bf$83$f$8$bf$99\_22$

$0$

fill in the blank b$8925$bf$83$f$8$bf$99\_23$

fill in the blank b$8925$bf$83$f$8$bf$99\_24$

Dec. $31,$ Year $4$ fill in the blank b$8925$bf$83$f$8$bf$99\_25$

$36,000$

fill in the blank b$8925$bf$83$f$8$bf$99\_26$

$0$

fill in the blank b$8925$bf$83$f$8$bf$99\_27$

$2($b$).$ Prepare the amortization of the right$-$of$-$use asset. If an amount box does not require an entry, leave it blank. Round your answers to the nearest cent.

Concord Corp.

Amortization of Right$-$of$-$Use Asset

Year $1-$ Year $4$

Straight$-$Line

Expense Interest on

Liability Amortization of

Right$-$of$-$Use Asset Balance

Jan. $1,$ Year $1$ $fill in the blank aa$859$c$0$b$3039031\_1$

$0$

$fill in the blank aa$859$c$0$b$3039031\_2$

$0$

$fill in the blank aa$859$c$0$b$3039031\_3$

$0$

$fill in the blank aa$859$c$0$b$3039031\_4$

Dec. $31,$ Year $1$ fill in the blank aa$859$c$0$b$3039031\_5$

fill in the blank aa$859$c$0$b$3039031\_6$

fill in the blank aa$859$c$0$b$3039031\_7$

fill in the blank aa$859$c$0$b$3039031\_8$

Dec. $31,$ Year $2$ fill in the blank aa$859$c$0$b$3039031\_9$

fill in the blank aa$859$c$0$b$3039031\_10$

fill in the blank aa$859$c$0$b$3039031\_11$

fill in the blank aa$859$c$0$b$3039031\_12$

Dec. $31,$ Year $3$ fill in the blank aa$859$c$0$b$3039031\_13$

fill in the blank aa$859$c$0$b$3039031\_14$

fill in the blank aa$859$c$0$b$3039031\_15$

fill in the blank aa$859$c$0$b$3039031\_16$

Dec. $31,$ Year $4$ fill in the blank aa$859$c$0$b$3039031\_17$

fill in the blank aa$859$c$0$b$3039031\_18$

fill in the blank aa$859$c$0$b$3039031\_19$

fill in the blank aa$859$c$0$b$3039031\_20$

$3.$ Prepare journal entries for Hawk $($the lessee$)$ for the first two years of the lease period. For compound entries, if an amount box does not require an entry, leave it blank. Round your answers to the nearest cent and use the rounded answer for the subsequent calculations.

Year $1$

Jan. $1$

Right$-$of$-$Use Asset

Lease Liability

Jan. $1$

Lease Liability

$36,000$

Cash

$36,000$

Dec. $31$

Lease Expense

Lease Liability

Right$-$of$-$Use Asset

Year $2$

Jan. $1$

Lease Liability

$36,000$

Cash

$36,000$

Dec. $31$

Lease Expense

Lease Liability