Question
On January 1, 2018, the lease commencement date, Curran Manufacturing Corporation (CMC) agreed to lease a piece of nonspecialized, heavy equipment to Oates Products, Inc.
On January 1, 2018, the lease commencement date, Curran Manufacturing Corporation (CMC) agreed to lease a piece of nonspecialized, heavy equipment to Oates Products, Inc. CMC paid $900,000 to manufacture the machine and carries it at this amount in its inventory. The fair value (current selling price) of the machine is $995,000. The relevant lease terms follow.
-Annual rental payments of $240,000 are due on January 1 of each year, with the first payment made at the commencenment of thelease. THe lease payments do not include any other lease componennts such as insurance or property taxes.
-The lease term is 4 years.
-There is no purchase option
-The lessee guarantees a residual value of $60,000 at the termination of the lease. This amount is equal to the expected residual value and there is no unguaranteed residual value frot the assest.
-The economic life of the asset is 7 years.
-The lessor's 7% implicit rate is known to Oates Products, Inc.
-The lessee's incremental borrowing rate is 9%.
- Annual maintenance is $10,000 and annual training is $7,700. The lessee pays both at the end of the year to an independent third-party vendor. The lessee classifies these costs as general and adminstrative expenses.
-CMC indicates that collectibility of all lease payments is reasonably assured, and it is probable that the residual value will be fully recovered.
-Oates depreciates (amortizes) similar equipment using the straight-line method.
REQUIRED:
a) Determine whether this is an operating, sales-type, or direct financing lease for the lessor.
b)Prepare the amortization table for the first three years of the lease term: (Date, Interest, Carring amount of)
c)Prepare the lessor's journal entries required for the first three years of the lease term (Date, Account titles and descriptions, Debit, Credit)
d) Prepare the December 31, 2021, journal entry for the lessor assuming that the equipment is returned with a fair value of $45,000. (Date, Account titles and descriptions, Debit, Credit)
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