P1. Alaska Gold leases its mining equipment from Fools Finance Company under the following lease terms.

The lease term is 6 years, non-cancelable, and requires equal rental payments of $164,600 due at the beginning of each year starting January 1, 2017.

The equipment has a fair value at the commencement of the lease (January 1, 2017) of $901,458 and a cost of $682,000 on Fools Finances books. It also has an estimated economic life of 10 years and an expected residual value of $175,000, though Alaska Gold has guaranteed a residual value of $200,000 to Fools Finance.

The lease contains no renewal options, and the equipment reverts to Fools Finance upon termination of the lease. The equipment is not of a specialized use.

Alaska Golds incremental borrowing rate is 10% per year. The implicit rate is also 10%.

Alaska Gold depreciates similar equipment that it owns on a straight-line basis.

Collectibility of the payments is probable.

Instructions

(Round all numbers to the nearest dollar.)

Evaluate the criteria for classification of the lease, and describe the nature of the lease. In general, discuss how the lessee and lessor should account for the lease transaction.

Prepare the journal entries for the lessee and lessor at January 1, 2017, and December 31, 2017 (the lessees and lessors year-end). Assume no reversing entries.

What would have been the amount of the initial lease liability recorded by the lessee upon the commencement of the lease if:

The residual value of $200,000 had been guaranteed by a third party, not the lessee?

The residual value of $200,000 had not been guaranteed at all?

On the lessors books, what would be the amount recorded as the lease receivable at the commencement of the lease, assuming:

The residual value of $200,000 had been guaranteed by a third party?

The residual value of $200,000 had not been guaranteed at all?