Question
North Crane Ltd. (NC) manufactures mobile cranes with an estimated economic life of 12 years and a normal selling price of $210,000. On August 1,
North Crane Ltd. (NC) manufactures mobile cranes with an estimated economic life of 12 years and a normal selling price of $210,000. On August 1, 2020, NC entered into a ten-year agreement to lease a mobile crane to Oakridge Building Corp. (OB). The unguaranteed residual value at the end of the lease term is estimated to be $45,000, and the bargain purchase option included in the lease is $15,000. OB will make annual payments of $25,000 at the beginning of each lease year and pay for all maintenance and insurance. NCs cost for producing the crane is $105,000. The collectability of OBs lease payments is reasonably predictable, and no additional costs will be incurred during the lease period. Both NC and OB follow ASPE, have a December year-end, and their implicit interest rate and incremental borrowing rate are both 8%.
Requirements:
(1) Determine the nature of the lease to lessee and to lessor, respectively, and use Excel functions to calculate the value of the lease to lessee and lessor, respectively.
(2) Prepare lease amortization schedules for the lessee and for the lessor, respectively, up to three years after the lease initiation.
(3) Prepare journal entries till August 1, 2021 (including August 1,2021), for the lessee and for the lessor, respectively, assuming that reversing entries are not used by both NC and OB.
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