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Question 1 Zebra Company as lessor enters into a lease agreement with United Company, on July 1, 2022, to give the right of use of
Question 1 Zebra Company as lessor enters into a lease agreement with United Company, on July 1, 2022, to give the right of use of its equipment to United. The following data are relevant to the lease agreement: 1. The term of the noncancelable lease is 4 years. Annual payments are due on July 1 of each year. There is an guaranteed residual value of $500,000 at the end of the least term. United Company estimates the residual value of the equipment at the end of the lease to be $200,000. 2. The fair value of the equipment on July 1,2022 is $3,500,000 and cost to Zebra Company is 2,500,000. The equipment has an economic life of 5 years with no salvage value. 3. United depreciates similar machinery it owns on the sum-of-the-years'-digits basis. 4. The lessee pays all executory costs. 5. Zebra used an implicit rate of 8% in computing the lease payments. The implicit rate is unknown to United and United's incremental borrowing rate is 10% per year. (Present value factor for 4 periods at 8%,3.57710; at 10%,3.48685, present value of 1 in 4 year time at 8%,0.735; at 10%,0.683). Required (a) Compute the annual lease payment required by Zebra on July 1 each year. (b) Indicate the type of lease Zebra Company has entered into. Discuss all the tests that are met if this is a finance lease. (c) For the lessee, United Company, compute the lease liability recorded by on 1 July 2022. Prepare an amortization schedule that is suitable for the lease term. (d) Prepare the journal entries for the lessee, United Company in 2022
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