Question
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
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.
- Record all journal entries for the lessee (Van Dyne) over the life of the lease.
- Record all journal entries for the lessor (Pym) over the life of the lease.
- 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.
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