The following data are available regarding a noncancelable lease.

• Lease term is 5 years, beginning January 1, 2020
• The leased property cost the lessor $400,000, its fair value, on January 1, 2020
• Estimated useful life of the asset is 6 years; residual value at the end of the 5-year useful life is $20,000, unguaranteed.
• No purchase option is available to the lessee. Ownership is retained by lessor at the end of the lease term.
• Five annual lease payments are payable on January 1 of each year (starting January 1, 2020) to yield the lessor a 6% return (implicit interest rate). Lessee does not know and cannot reliably estimate the lessors yield rate. Lessees incremental borrowing rate is 7%.
• Lessees credit rating is excellent. The accounting year-end for the lessee is December 31.

Required:

Compute the annual lease payment.

1. What type of lease is this to the lessee?

Financial lease

2. Prepare all journal entries associated with this lease for the lessee for the year ended December 31, 2020.

3. What balances (account titles, amounts) appear on the lessees balance sheet on December 31, 2020 related to the lease?

Assets: Liabilities:

Current: Current:

_______________________$_________ _______________________$____________

Noncurrent: Noncurrent:

_______________________$_________ _______________________$____________

4. What balances (account titles, amounts) appear on the lessees income statement for 2020, related to the lease?

Income Statement:

_______________________________$______________

_______________________________$______________

5. How would the lessees balance sheet and income statement change for 2020 if this were classified as an operating lease?

Assets: Liabilities:

Current: Current:

_______________________$_________ _______________________$____________

Noncurrent: Noncurrent:

_______________________$_________ _______________________$___________

Income Statement:

_______________________________$______________

_______________________________$______________