Problem 3.1: Chapter 21 - Leases (13 points)

On January 1, 2020, Sindri and Brokkr, Inc. lease a blacksmith warehouse from Hephaestus, Corp. The lease terms are as below.

Lease Term (yrs) 51 Guaranteed Residual Value $0

Minimum Lease Payment $75,000 Expected Residual Value $24,500,000

Fair Value $25,500,000 Ownership at End of Lease Hephaestus, Corp.

Asset Cost (on Hephaestus's Books) $13,000,000 Purchase Option @ End of Lease $24,000,000

Asset Life (yrs) 1500

If applicable, Hephaestus depreciates all assets on a straight-line basis. Sindri and Brokkr, Inc uses 11% as its required rate of return when calculating lease returns and is unaware of Hephaestus, Corp marginal borrowing rate. All amounts are paid on January 1 of each year. Both Sindri and Brokkr, Inc. and Hephaestus, Corp have December 31 year-ends.

REQUIRED: Answers the following for Sindri and Brokkr, Inc.: (CLEARLY SHOW AND LABEL YOUR WORK)

(a) [2 pts] What is the classification of this lease and why?

(b) [4 pts] What is the journal entry for January 1, 2020?

(c) [3 pts] What is the journal entry for December 31, 2020?

(d) [2 pts] What is the journal entry for January 1, 2021?

(e) [2 pts] What is the journal entry for December 31, 2021?