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Lessee Company leases heavy equipment on January 1, 2018 under capital lease from Lessor Company with the following lease provisions: The lease in noncancellable and
Lessee Company leases heavy equipment on January 1, 2018 under capital lease from Lessor Company with the following lease provisions: The lease in noncancellable and has a term of 6 years. The lease does not contain a renewal or bargain purchase option. The annual rentals are $56,100 (including executory costs), payable at the beginning of each year. The Lessor Company agrees to pay all executor costs, which are expected to be $1,100 annually, including insurance of $350, property taxes of $500, and maintenance of $250. The interest rate implicit in the lease in 14% which is known by Lessee Company. The residual value of the property at the end of 6 years is estimated to be $60,000 and the lessee guaranteed the residual value. The cost and fair value of the equipment to the lessor is $271,154.64. The lessor incurs no material initial direct costs. The collectability of the rentals is reasonably assured and no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor. Lessee's incremental borrowing rate is 15% and it uses the sum of the years' digits method to record depreciation on similar equipment Instructions: 1. Identify the type of lease involved for the lessee and the lessor, and give reasons for your classifications. 2. Prepare the amortization table for the lessee. 3. Prepare all the journal entries for both lessee and lessor for 2018
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