Question
On January 1, 2021, New Port Company leased equipment from Scanner Company. The lease had a non-cancelable four year term and required annual lease payments
- On January 1, 2021, New Port Company leased equipment from Scanner Company. The lease had a non-cancelable four year term and required annual lease payments of $90,000 to be paid on January 1 of each year with the first payment due January 1, 2021.
In addition, New Port also needs to make annual payment of $3,000 (fixed) to the lessor for executory costs (such as insurance and property tax) on January 1 of each year.
New Port guarantees a $47,500 residual value, and estimates an expected residual value of $40,000 at the end of the lease term.
New Port incurred $6,000 legal fees from the execution of the lease.
The estimated economic life of the equipment is 5 years.
New Port's incremental borrowing rate is 6% and Scanner's implicit interest rate is 5%, which is known by New port. New Port uses straight-line depreciation for its plant assets.
a. prepare a lease amortization schedule over the first 3 years of lease term for the lessee.
b. Prepare journal entries for the lessee for 2021 and 2022
c. Explain how to report the related assets or liabilities on the lessee's Balance Sheet as of December 31, 2022
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