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On January 1, 2021, ACME Incorporated, a publicly traded company, signed a 5-year, non-cancellable lease agreement to lease equipment from Lessor Ltd. The details of
On January 1, 2021, ACME Incorporated, a publicly traded company, signed a 5-year, non-cancellable lease agreement to lease equipment from Lessor Ltd. The details of the agreement are as follows:
1. | Yearly rental payments due January 01 each year of $150,000. |
2. | Initial lease term: 5 years. |
3. | Estimated economic life of leased equipment: 10 years. |
4. | Equipment fair value at January 01, 2021: $661,000. |
6. | The equipment has a residual value of $15,000 at the end of the lease, which is not guaranteed by ACME. |
7. | At the end of the lease the equipment will be returned to the lessor. |
Additional information:
- ACME's incremental borrowing rate is 10%.
- The rate implicit in the lease is 11% and it is not known to ACME.
- The interest rate implicit in the lease is not known to ACME.
Required (round calculation to four decimal places and final answers to the nearest dollar):
- How will the lease be classified by the lessor assuming that the company follows ASPE. Support your answer.
- Assuming the lease is classified as a direct financing lease by the lessor prepare the journal entries for 2022.
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