You are the assistant controller for Scrappy Foods, Inc. The controller is asking you to help with the proper accounting for a lease as the lessee.

On December $31,2024,$ Scrappy Foods, Inc., signed a lease for the company$$s warehouse. The five$-$year lease calls for Scrappy to make quarterly payments payable each December $31,$ March $31,$ June $30,$ and September $30,$ with the first payment on December $31,2024.$ Scrappy records amortization on a straight$-$line basis at the end of each fiscal year ending December $31.$ The fair value of the warehouse at the inception of the lease and the implicit interest rate $($known by Scrappy$)$ are provided in a separate file.

On January $1,2026,$ the company is considering subleasing the underused warehouse to the Titan Corporation for the remaining four years of the lease. Under the agreement, Titan would become the new lessee as primary obligor, and Scrappy would not be secondarily liable for fulfilling the obligations under the lease.

The controller asks, $$Check on how we should account for this and get back to me$.$

Required $($answer all questions on this document, except where noted$)$:

$1.$ Discuss the proper classification of this lease under US GAAP as an operating lease or finance lease. Support your answer.

$2.$ On the spreadsheet template related to this problem:

a$.$ Prepare an amortization table for the lease for the full term of the lease.

b$.$ Prepare all necessary lessee journal entries for the lease through December $31,2025.$

$3.$ At what amount will the lease be reported by Scrappy on December $31,2025?$

$4.$ Obtain the relevant authoritative accounting literature from the FASB$$s Accounting Standards Codification $($www$.$fasb.org$)$ regarding the derecognition of finance leases. Determine the appropriate accounting treatment for the proposed sublease and write a memo to the controller with the following information:

a$.$ List the specific seven$-$digit Codification citation $($FASB ASC xxx$-$xx$-$xx$)$ for derecognition of finance leases,

b$.$ Discuss whether the proposed sublease will qualify as a termination of a finance lease, and

c$.$ Discuss the proper accounting treatment for the proposed sublease.

d$.$ What journal entry, if any, would Scrappy make on January $1,2026,$ in connection with the sublease?

i$.$ Show this entry on the spreadsheet template, too.

lease term $5$ years

payments per year $4$

implicit rate $13\mathrm{.}0\%$

fair value of asset $96000000$