OPTION #2 Lease: Non-cancelable lease agreement between Fifth-Third Leasing Company and Bob Evans Farms, a lessee

This question has been posted before with different values. However, there are several different solutions posted.

Please provide the following:

1. Prepare LEASE AMORTIZATION SCHEDULE suitable fo LESSEE for the lease term

2. Prepare JOURNAL ENTRIES for LESSEE for 2018 and 2019 - record lease agreement and all expenses relates to lease. Assume LESSEE'S annual accounting period ends on Dec 31 and reversing entries are used when appropriate.

3. Prepare JOURNAL ENTRIES for LESSOR of the transaction.

4. Analyze the specific outcomes and WRITE AN ANALYSIS directed toward the team at Fifth-Third Leasing Company describing what the numbers mean and how they relate to the business.

Question:

1. What type of lease is this? Operating or Finance/Sales-Type? Why?

My thoughts:

--It seems to meet 2 of the 4 Finance lease criteria (lessee) - 1) term is equal to 75% or more of est. the economic life of the asset (6 yrs/8 yrs) and 2) the present value of minimum lease payments is equal to 90% or more of the fair value of the leased property to the lessor ($743,552/$800,000)

--it also seems to meet both additional Finance lease required criteria (lessor) - 1) collectibility of lease payments is predictable and 2) no important uncertainties surround unreimbursable costs yet to be incurred by the lessor under the lease

FACTS:

Inception date: January 1, 2018

Residual value of equipment at end of lease term, guaranteed by the lessee: $100,000

Lease term: 6 years

Economic life of leased equipment: 8 years

Fair value of asset at January 1, 2017: $800,000

Lessor's implicit rate: 10%

Lessee's incremental borrowing rate: 12%

The lessee assumes responsibility for all executory costs, which are expected to amount to $4,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $100,000. The lessee uses the straight-line depreciation method for all equipment.