Problem 120 (Part Level Submission) Merando Corporation leases a building to Fernetti, Inc. on January 1, 2017. The following facts pertain to the lease agreement. 1. The lease term is 10 years with equal annual rental payments of $51,800 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 $514,800, a book value to Merando of $327,800, and a useful life of 15 years 4. At the end of the lease term, Merando and Fernetti expect the residual value of the building to be $187,000, and this amount is guaranteed by Baden, Inc., a third party S. Merando wants to earn a 5% return on the lease, and collectability of the payments is probable. 2 Your answer has been saved and sent to the instructor. See Gradebook for score details. Describe the nature of this lease to both Merando and Fernetti. This is the lessor's accounting for operating leases. It is an operating lease because none of the five finance lease tests were passed. The term of the lease is 18 years. There are $51,880 annual lease payments at the end of each year so it is an ordinary annuity calculation. There is a cost and fair value of $514,80e and an estimated economic life 7] Your answer is partially correct. Try again. Assume the rate of return to amortize the net lease receivable to zero is 13%. Prepare the journal entries to record the entries for Herando for 2017 and 2010, (credit account titles are automatically indented when amount is entered. Do not indent manually) Policy All Rights Reserved. A Divislion of Jobn Wley & Sons, Inc Version 4.24.10.E