Question
Oscar, Inc., leased equipment from Reynolds Company on January 1, 2023. Reynolds manufactured the equipment at a cost of $200,000. The equipment has a fair
Oscar, Inc., leased equipment from Reynolds Company on January 1, 2023. Reynolds manufactured the equipment at a cost of $200,000. The equipment has a fair value of $260,000.
Information related to the lease appears below:
Lease term: 5 years
First lease payment: January 1, 2023
Subsequent lease payments: December 31, 2023, 2024, 2025, 2026
Economic life of the equipment: 6 years
Estimated value of equipment at end of economic life: $0
Purchase option, reasonably expected to be exercised by Oscar: $20,000
Implicit and incremental borrowing rate 8%
Required:
- Determine the amount of the annual payments using Time Value of Money Tables. Show computations.
- Apply the lease classification criteria to this lease. From the lease criteria, determine the lease categorization for Oscar, the lease and Reynolds, the lessor.
- Prepare the entries to record the lease and the first payment for both the lessee and the lessor on January 1, 2023
- Prepare an amortization table for the lessee and the lessor for the term of the lease
- Prepare all the required journal entries for Oscar & Reynolds on December 31, 2023.
- Prepare all required Jornal entries for Oscar and Reynolds on December 31, 2027, the end of the lease term.
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