Reporting Finance Lease, Guaranteed Residual Lessee

Mac Leasing Company (lessor) and Ash Corporation (lessee) signed a four-year lease on January 1 of Year 1. The underlying asset has an estimated life of six years and a fair value of $500,000, and the property reverts to Mac at the end of the lease term. Lease payments of $119,230 are payable on January 1 of each year beginning at the lease commencement and are set to yield Mac a return of 8%, which is known to Ash. The estimated residual value at the end of the lease term is $100,000 and is guaranteed by Ash Corporation. Ash expects the residual value at the end of the lease term to be $100,000. The lease contains no purchase option.

Required

a. How would Ash Corporation classify the lease?

b. What is the lease liability balance on January 1, the lease commencement date? Note: Round your answer to the nearest whole dollar.

c. Prepare the entries for Ash Corporation on January 1 and December 31 of Year 1. Note: Round your answers to the nearest whole dollar.

d. Assume that Ash Corporation expects the residual value at the end of the lease term to be $35,000. Prepare the entries for Ash Corporation on January 1 and December 31 of Year 1.

Note: Round your answers to the nearest whole dollar.

\begin{tabular}{|l|r|r|r|} \hline \multicolumn{1}{|c|}{ Date } & Account Name & Dr. \\ \hline Jan. 1, Year 1 & To record asset and liability related to lease & \\ \hline & & & \\ \hline Jan. 1, Year 1 & To record lease payment & & \\ \hline & & & \\ \hline Dec. 31, Year 1 & & & \\ \hline & To record interest & & \\ \hline & & & \\ \hline Dec. 31, Year 1 & & & \\ \hline & To record amortization & & \\ \hline \end{tabular} \begin{tabular}{|l|l|l|l|} \hline \multicolumn{1}{|c|}{ Date } & Account Name & Dr. & Cr. \\ \hline Jan. 1, Year 1 & & & \\ \hline & To record asset and liability related to lease & \\ \hline Jan. 1, Year 1 & & & \\ \hline & To record lease payment & & \\ \hline & & & \\ \hline Dec. 31, Year 1 & & & \\ \hline & To record interest & & \\ \hline Dec. 31, Year 1 & & & \\ \hline & & & \\ \hline & To record amortization & & \\ \hline \end{tabular}