LSE$-10$

On January $1,2017$ T$$Pol Co$.$ leases a warp core to Tucker Inc. The details are as follows:

$$ The lease term is $10$ years with annual rental payments of $$3,449$ at the end of each year.

$$ Ownership is not transferred, there is no purchase option, and the asset is not specialized in nature. Collectability of payments is probable.

$$ The core has a fair value of $$34,000,$ a book value of $$22,000,$ and a useful life of $15$ years.

$$ At the end of the lease term, T$$Pol expects the core to be worth $$12,000.$ $$8,000$ of this value has been guaranteed by Quark Co$.,$ a third party.

$$ Tucker$$s incremental borrowing rate is $6\%$ and it does not know the implicit rate in the lease.

$1.$ Classify this lease for both T$$Pol and Tucker.

$2.$ Determine the implicit rate on the lease. Prepare T$$Pol$$s amortization tables.

$3.$ Prepare the $2017$ and $2018$ journal entries for T$$Pol$.$

$4.$ Prepare Tucker$$s $2017$ and $2018$ journal entries.

$5.$ Suppose that Tucker guaranteed the residual value instead of Quark. Would this change the classification of the lease for Tucker or T$$Pol$?$ Compare the net income T$$Pol would recognize from the lease in the first year under both scenarios. Which is higher and why?