Problem 21-06 (Part Level Submission)

Novak Leasing Company agrees to lease equipment to Splish Corporation on January 1, 2020. The following information relates to the lease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.

2.The cost of the machinery is $517,000, and the fair value of the asset on January 1, 2020, is $657,000

3.At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $55,000. Splish estimates that the expected residual value at the end of the lease term will be 55,000. Splish amortizes all of its leased equipment on a straight-line basis

4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020

5.The collectibility of the lease payments is probable.

6.Novak desires a 10% rate of return on its investments. Splishs incremental borrowing rate is 11%, and the lessors implicit rate is unknown. (Assume the accounting period ends on December 31.)

A. Discuss the nature of this lease for both the lessee and the lessor.

-This is a finance lease for Splish

-This is a sales type lease for Novack

B. Calculate the amount of the annual rental payment required.

- Annual rental payment $117413

C. Compute the value of the lease liability to the lessee.

- Present value of minimum lease payments ????

D. Prepare the journal entries Splish would make in 2020 and 2021 related to the lease arrangement

E. Prepare the journal entries Novak would make in 2020 and 2021 related to the lease arrangement.