1. (LESSEE ENTRIES FOR FINANCING LEASE).

The following facts pertain to a non-cancelable lease agreement between Ace Leasing Company and King Company, a lessee.

Commencement of Lease Date January 1, 2020

Annual lease payment due at the beginning of the year beginning with January 1, 2020 $137,171

Residual value of equipment at end of lease term, guaranteed by lessee $54,000

Expected residual of equipment that will need to be paid in cash at end of lease term $49,000

Lease term 6 years

Economic life of leased equipment 7 years

Fair Value of asset at January 1, 2020 $659,000

Lessors Implicit Rate 12%

Lessees incremental borrowing rate 12%

The asset will revert to the lessor at the end of the lease term.

1. Is this an operating or financing lease to the Lessee? Explain.
2. Compute the Lease Liability to be recorded by the Lessee at inception of the lease and compute the ROU Asset to be recorded by the Lessee at inception. Based on those complete the two Lessee entries 1/1/2020.
3. Prepare an interest amortization table for the first two periods and prepare the related two entries at year-ends 2020 and 2021.
4. Compute the ROU Asset Amortization for the first two periods and prepare the related two entries at year-ends 2020 and 2021.

2. (LESSEE ENTRIES FOR AN OPERATING LEASE).

Assume that Ace Leasing Company and King Company, a lessee, agreed to the lease shown below instead on the one shown in problem 1.

Commencement of Lease Date January 1, 2020

Annual lease payment due at the beginning of the year beginning with January 1, 2020 $137,171

Lease term 6 years

Economic life of leased equipment 10 years

Fair Value of asset at January 1, 2020 $950,000

Lessors Implicit Rate 12%

Lessees incremental borrowing rate 12%

The asset will revert to the lessor at the end of the lease term. The lessee uses straight-line amortization for all leased equipment.

1. Is this an operating or financing lease to the Lessee? Explain.
2. Compute the Lease Liability to be recorded by the Lessee at inception of the lease and compute the ROU Asset to be recorded by the Lessee at inception. Based on those complete the two Lessee entries 1/1/2020.
3. Compute the yearly Lease Expense on King Company financial statements.
4. Compute the Interest Expense for the first two years.
5. Compute the ROU Asset Amortization for the first two years.
6. Prepare the remaining entries for December 31, 2020 (the end of the first year).