On January 1, 2020, lessor Marcy and lessee Lenox contract for the lease of a machine for five payments of $13,300 each. The $13,300 payments are to be paid at the end of each year. They also agree that at the time of the fifth payment, for an added $11,400 purchase option payment, Lenox can buy the property. Lenox reasonably expects to exercise the purchase option as the amount is well under the expected fair value at that time. Lenoxs incremental borrowing rate is 6% per year and Lenox is unaware of the implicit rate of the lease. The economic life of the asset is six years.

1. How would Lenox classify the lease?

2.

Compute the value of the lease liability.

Answer

3.Prepare an amortization schedule of the lease liability.