LSE-5 (Operating Lease)

On January 1, 2017, Pym Co. leases an armored suit it constructed at a cost of $850,000 to Van Dyne Co for 3 years. The suit has a fair market value is $900,000 and an expected life of 8 years with no salvage value. The lease requires equal annual payments at the beginning of each year. Pym expects the residual value of suit to be $583,262 and has priced a 7% implicit return into the lease because Van Dyne has not guaranteed any of the residual value. Van Dyne has a 6% incremental borrowing rate and does not know the implicit rate of the lease. Both companies use straight-line depreciation for their assets and operate on a calendar-year basis.

1. Record all journal entries for the lessee (Van Dyne) over the life of the lease.
2. Record all journal entries for the lessor (Pym) over the life of the lease.
3. Suppose the lease was only for one year (only one payment for the amount calculated in #1 made at the commencement of the lease), with a renewal option at market rates at the end of the lease. Record Van Dynes 2017 lease entries if it elects to use the short-term lease exception to account for the lease.