LESSEE ACCOUNTING PROBLEM 1

ABC Company (ABC), on January 1, 2019, enters into a 10-year noncancelable lease for

equipment having an estimated useful life of 10 years. XYZ Corp.s implicit interest rate is 8%.

ABC uses the straight-line method to depreciate its assets.

The lease contains the following provisions:

1. Rental payments of $200,000 at the beginning of each six-month period (SEMIANNUAL PAYMENTS).

2. A guarantee by ABC that XYZ Corp. (XYZ) will realize $100,000 from selling the asset (RESIDUAL VALUE) at the expiration of the lease. ABC believes that it is probable that the expected residual value will be greater than the guaranteed residual value.

3. The lease contains no renewal options. The equipment reverts to lessor at the termination

of the lease.

Required:

1. Compute the present value test.
2. Compute the present value of the lease payments to be recorded as a liability.

c. Prepare an amortization schedule table for the liability through the year 2021.

d. Prepare journal entries for the year 2019.