On January 1, Year 1, Multi Ventures (MV) leased an asset with eight-year useful life, a fair value of $300,000 and a cost of $240,000 from Leases R Us (LRU) for six years. The lease calls for annual payments of $50,992.25, due on the first day of each year, beginning with the lease inception, and the interest rate implicit in the lease is 7%, so the present value of the lease payments is $260,019.

1. Assume that the lease includes a purchase option that the lessee is likely to exercise in the amount of $60,000. The present value of this amount is $39,98 Prepare the journal entries to record the lease at inception, for the first payment, and for the end of year 1 for both the lessee and the lessor.
2. Assume instead that the lease includes unguaranteed residual value of $60,000 (present value $39,981). Prepare the journal entries to record the lease at inception, for the first payment, and for the end of year 1 for both the lessee and the lessor.
3. How would your answer to #2 change if the useful life of the asset were instead ten years?
4. For future review: Can you demonstrate the calculation to arrive at the present values for the amounts, and for the payment amount?
5. For future review: Do you know the lease classification criteria for both the lessee and the lessor?