P21-17B (L03) GROUPWORK (Lessee-Lessor Entries, Operating Lease with an Unguaranteed Residual Value) Colorado Inc. leased a new front-end loader to Cho Construction under a 4-year, non-cancelable contract starting January 1, 2017. Terms of the lease require payments of $30,507 each January 1, starting January 1, 2017. The front-end loader has an estimated life of 9 years, a fair value of $175,000, and a cost to Colorado of $140,000. The estimated fair value of the front-end loader is expected to be $36,000 (unguaranteed) at the end of the lease term. No bargain purchase or renewal options are included in the contract, and it is not a specialized asset. Both Colorado and Cho adjust and close books annually at December 31 . Collectibility of the lease payments is probable. Cho's incremental borrowing rate is 9%, and Colorado's implicit interest rate of 8% is unknown to Cho. Instructions (Round all numbers to the nearest dollar.) (a) Identify the type of lease involved and give reasons for your classification. Discuss the accounting treatment that should be applied by both the lessee and the lessor. (b) Prepare all the entries related to the lease contract and leased asset for the year 2017 for the lessee and lessor, assuming Cho uses straight-line amortization for all similar leased assets, and Colorado depreciates the asset on a straight-line basis with a salvage value of $10,000. (c) Discuss what should be presented in the balance sheet, the income statement, and the related notes of both the lessee and the lessor at December 31, 2017. P21-17B (L03) GROUPWORK (Lessee-Lessor Entries, Operating Lease with an Unguaranteed Residual Value) Colorado Inc. leased a new front-end loader to Cho Construction under a 4-year, non-cancelable contract starting January 1, 2017. Terms of the lease require payments of $30,507 each January 1, starting January 1, 2017. The front-end loader has an estimated life of 9 years, a fair value of $175,000, and a cost to Colorado of $140,000. The estimated fair value of the front-end loader is expected to be $36,000 (unguaranteed) at the end of the lease term. No bargain purchase or renewal options are included in the contract, and it is not a specialized asset. Both Colorado and Cho adjust and close books annually at December 31 . Collectibility of the lease payments is probable. Cho's incremental borrowing rate is 9%, and Colorado's implicit interest rate of 8% is unknown to Cho. Instructions (Round all numbers to the nearest dollar.) (a) Identify the type of lease involved and give reasons for your classification. Discuss the accounting treatment that should be applied by both the lessee and the lessor. (b) Prepare all the entries related to the lease contract and leased asset for the year 2017 for the lessee and lessor, assuming Cho uses straight-line amortization for all similar leased assets, and Colorado depreciates the asset on a straight-line basis with a salvage value of $10,000. (c) Discuss what should be presented in the balance sheet, the income statement, and the related notes of both the lessee and the lessor at December 31, 2017
