Part V: Lessee Company enters into a lease agreement on July 1, 2017, for equipment. The following data are relevant to the lease agreement 1. The term of the non-cancelable lease is 6 years, with no renewal option. Payments of $225,000 are due on June 30 of each year. 2. The equipment has an economic life of 8 years with a residual value of $25,000, but not guaranteed. 3. Lessee depreciates similar machinery it owns on the sum-of-the-years'-digits basis. 4. The lessee pays all executory costs. 5. Lessee's incremental borrowing rate is 12% per year. Lessee is aware that the lessor used an implicit rate of 10% in computing the lease payments. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor INSTRUCTIONS: (a) Indicate the type of lease to the Lessee and Lessor. (b) Prepare the journal entries on the books of lessee and lessor through December 31, 2018, and at the end of the lease assuming that the actual residual value was 1) $45,000, and 2) $20,000. (c) Assuming that the residual value is guaranteed, prepare the journal entries on the books of lessee and lessor through December 31, 2018, and at the end of the lease assuming that the actual residual value was 1) $45,000, and 2) $20,000. Part V: Lessee Company enters into a lease agreement on July 1, 2017, for equipment. The following data are relevant to the lease agreement 1. The term of the non-cancelable lease is 6 years, with no renewal option. Payments of $225,000 are due on June 30 of each year. 2. The equipment has an economic life of 8 years with a residual value of $25,000, but not guaranteed. 3. Lessee depreciates similar machinery it owns on the sum-of-the-years'-digits basis. 4. The lessee pays all executory costs. 5. Lessee's incremental borrowing rate is 12% per year. Lessee is aware that the lessor used an implicit rate of 10% in computing the lease payments. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor INSTRUCTIONS: (a) Indicate the type of lease to the Lessee and Lessor. (b) Prepare the journal entries on the books of lessee and lessor through December 31, 2018, and at the end of the lease assuming that the actual residual value was 1) $45,000, and 2) $20,000. (c) Assuming that the residual value is guaranteed, prepare the journal entries on the books of lessee and lessor through December 31, 2018, and at the end of the lease assuming that the actual residual value was 1) $45,000, and 2) $20,000
