Needed Information:

-The equipment has an estimated useful life of 13 years. -There is no purchase option. Transfer of ownership to Michael is not stipulated in the lease contract. -The fair value to Thomas (lessor) at the inception of the lease was $4,000,000. Lessor's cost was $3,775,000. Sales commissions were $2,500. -Michael's incremental borrowing rate is 10%. The implicit annual rate in the lease (known to Michael) is 8%. - Michael and Thomas use straight-line depreciation. -The lease requires rental payments of $266,000, payable on 1/2/20 and subsequently on 6/30 and 12/31. -Michael guarantees that Thomas will realize $200,000 from selling the asset at the end of the lease. The expected residual value is $120,000.

1. Refer to the Needed information and assume that Michael had the option to buy the asset on 12/31/2022 for $2,000,000. It is reasonably certain that Michael would exercise the purchase option. Discuss at what amount Bonjour should record the ROU asset on January 2, 2020 and what the ROU amortization for 2020 would be.

2. Refer to the original facts. However, also assume that Michael had to pay semi-annual insurance premiums ranging from an estimated $800 to $2,100 and that Michael incurred $2,400 to execute the lease. Discuss at what amount Michael should record the ROU asset. Tip: credit Cash 2,400 for initial direct cost; executory costs are variable

Tip: 266,000 (P5,4% +1.00) +2,000,000 (p6,4%) = ROU Asset ROU Asset amortization based on criteria # 2