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V: Lessee Mark and lessor Ned on January 1, 2019 enter into a 4-year non-cancelable lease, with two renewal options of one year each, for
V: Lessee Mark and lessor Ned on January 1, 2019 enter into a 4-year non-cancelable lease, with two renewal options of one year each, for equipment having a useful life of 12 years. Lessee's incremental borrowing rate is 8% while lessor's implicit rate is 5% and known to lessee. Mark uses the straight-line method of depreciation. The lease contains the following provisions: 1. Annual rental payments of $20,000 payable at the beginning of each year, starting January 1, 2019. 2. A termination penalty assures the renewal of the lease for the additional two years. 3. There is a guaranteed residual value at the end of the lease for $10,000. 4. The equipment has a cost of $110,000 and fair value of $120,000. Collectability of lease payments is probable. INSTRUCTIONS: (a) What kind of lease is this to Mark the lessee and Ned the lessor? (b) Prepare the journal entries on the books of Mark and Ned through December 31, 2024. (c) What if the residual value is unguaranteed? (d) What if there is a bargain purchase option of $10,000 at the end of the lease
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