Question
On January 1, 2020, Better, Inc. entered into an equipment lease with Canyon Corp. under which Better agrees to lease equipment that was manufactured by
On January 1, 2020, Better, Inc. entered into an equipment lease with Canyon Corp. under which Better agrees to lease equipment that was manufactured by Canyon and that has an expected useful life of 4 years. The cost to manufacture the equipment was $550,000 and its normal sales price is $700,000. The lease term is 3 years and Canyon expects to recover the equipments normal sales price through 3 lease payments of $234,000 each in order to earn an 8% rate of return. The residual value is expected to be $61,370. Better doen't guaranteed the residual value. The lease payment is due at lease signing and each of the following January 1. Better is aware of Canyons expected rate of return and normally amortizes the assets by the straight-line method. Canyon is reasonably confident that Better will make the lease payments and has no material uncertainties.
Round your numbers to the nearest whole numbers.
Required:
- According to the FASB, how should the lease be classified by both Better (lessee) and Canyon (lessor)? Why?
- Calculate the present value of lease liability and lease receivable on lease signing date.
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Prepare lease amortization schedules up to 1/1/2021for both better and Canyon.
- prepare the journal entries to record the inception of the lease and the first lease payment on January 1, 2020 for both Better and Canyon.
- Prepare the appropriate journal entries for both Better and Canyon at December 31, 2020.
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