Question
Oriole Corporation leases a building to EZ, Inc. on January 1, 2020. The following facts pertain to the lease agreement. 1. The lease term is
Oriole Corporation leases a building to EZ, Inc. on January 1, 2020. The following facts pertain to the lease agreement.
1. The lease term is 10 years with equal annual rental payments of $51,735 at the end of each year.
2. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature.
3. The building has a fair value of $510,000, a book value to Oriole of $330,000, and a useful life of 15 years.
4. At the end of the lease term, Oriole and EZ expect the residual value of the building to be $180,000, and this amount is guaranteed by Balding, Inc., a third party.
5. Oriole wants to earn a 5% return on the lease, and collectability of the payments is probable.
a) Describe the nature of this lease to both Oriole and EZ.
b) Assume the rate of return to amortize the net lease receivable to zero is 13.24%. Prepare the journal entries to record the entries for Oriole for 2020 and 2021.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started