On February 1, 2018, Garnett Company (as lessor) entered into a 5 year non-cancelable lease agreement with Reanna Company (lessee) for machinery which had a market value of $160,000. The lease expires on January 31, 2023. Payments of $35,508 are due each February 1. The first payment was made on February 1, 2018 (at beginning of lease) when the lease agreement was signed. There is a bargain purchase option of $10,000 at the end of the lease. The interest rate of 10% which was stipulated in the lease agreement is the implicit rate set by the lessor and is known. The incremental borrowing rate is 11%. The machine has an estimated total economic life of eight-years, and is depreciated on a straight-line basis by Reanna Company. Year end for Reanna Company is December 31.

Use the PV Tables and show your work.

Instructions

1. (a) From the lessee's (Reanna Company) viewpoint, what kind of lease is the above agreement assuming ASPE? Explain showing all the criteria.

2. (b) Prepare a lease amortization schedule for the lease liability.

3. (c) Show all journal entries that will be recorded by Reanna Company in 2018 and 2019 including year-end adjusting entries at December 31.