Question
On January 1, 2017, BMC Company leased equipment to Pioneer Tech Co. for a two-year period ending December 31, 2018. At the end of the
On January 1, 2017, BMC Company leased equipment to Pioneer Tech Co. for a two-year period ending December 31, 2018. At the end of the lease term, the leased asset will be reverted back to BMC Company. The cost of the equipment is $27,000, and the fair value of the asset on 1/1/2017 is $43,141. The equipment has an expected useful life of three years on 1/1/2017. The lessee- guaranteed residual value at the end of the non-cancelable lease term is $6,000 with an expected residual value of $3,000. The annual lease payment is $20,000 and is due on January 1 of each year with the first payment on 1/1/2017. The collectability of the remaining lease payments is reasonably assured and the equipment does not possess a specialized nature. Both BMC Company and Pioneer Tech Co. use 10% discount rate and straight-line depreciation. Required: a. Show how BMC Company calculated the $20,000 annual lease payment. b. How should this lease be classified by Pioneer Tech Co. (the lessee) and by BMC Company (the lessor)? c. Prepare the appropriate entries for Pioneer Tech Co. on 1/1/2017, 12/31/2017, 1/1/2018 and 12/31/2018 (assuming that the equipment was reverted back to BMC and the residual value of the equipment on 12/31/2018 is $2,500 (Note: these entries should be prepared based on finance lease for Pioneer Tech regardless of your answer in b)
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