Question
On January 1, 2020, Tiffany Company leased new equipment to Masys Corporation. The equipment cost Tiffany $180,000. The lease agreement specified that Masys is to
On January 1, 2020, Tiffany Company leased new equipment to Masys Corporation. The equipment cost Tiffany $180,000. The lease agreement specified that Masys is to make five annual lease payments (on January 1, beginning January 1, 2020) to yield Tiffany a 5% return. The equipment has a five-year useful life with an unguaranteed residual value of $9,000. In December 2019, Tiffany paid Masys $1,000 as an incentive to sign the lease and Masys paid legal fees of $500 related to the execution of the lease. Ownership of the lease asset remains with Tiffany at the end of the lease term. Masys is aware of the implicit interest rate used by Tiffany. The accounting period for Masys ends December 31.
Required: a. Compute the annual fixed lease payment. b. What type of lease is this to the lessee? Explain. c. Provide all journal entries associated with this lease for the lessee for the years ended December 31, 2020, and 2021.
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