The following facts are for a non-cancellable lease agreement between Hebert Corporation and Russell Corporation, a lessee:
Inception dateJuly ..................... 1, 2011
Annual lease payment due at the
beginning of each year, starting July 1, 2011 ...........$20,066.26
Bargain purchase option price at end of lease term ........ $ 4,500.00
Lease term ......................... 5 years
Economic life of leased equipment .............. 10 years
Lessor’s cost ......................$60,000.00
Fair value of asset at July 1, 2011 ...............$88,000.00
Lessor’s implicit rate ................... 9%
Lessee’s incremental borrowing rate .............. 9%
The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties about costs that have not yet been incurred by the lessor. The lessee assumes responsibility for all executory costs. Both Russell and Hebert use private enterprise GAAP.
Instructions
Answer the following, rounding all numbers to the nearest cent.
(a) Discuss the nature of this lease to Russell Corporation, the lessee.
(b) Discuss the nature of this lease to Hebert Corporation, the lessor.
(c) Prepare a lease amortization schedule for the lease obligation using a computer spreadsheet for Russell Corporation for the five-year lease term.
(d) Prepare the journal entries on the lessee’s books to reflect the signing of the lease and to record the payments and expenses related to this lease for the years 2011 and 2012. Russell’s annual accounting period ends on December 31, and Russell does not use reversing entries.
(e) Discuss the differences, if any, in the classification of the lease to Russell Corporation (the lessor) or to Hebert Corporation (the lessee) if both were using IFRS in their financial reporting.