Question

Assume that the following facts pertain to a non-cancelable lease agreement between Coco Inc. and Bubs Corp, a Lessee.

Inception date	January 1, 2018
Residual value of equipment at end of lease term, unguaranteed	$100,000
Lease term	6 years
Economic life of leased equipment	8 years
Fair value of asset at January 1, 2017	$800,000
Lessor’s implicit rate	12%
Lessee’s incremental borrowing rate	10%

The lessee assumes responsibility for all executory costs, which are expected to amount to $4,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee uses the straight-line depreciation method for all equipment.

Using the spreadsheet Lease Amort Schedule, prepare an amortization schedule that would be suitable for the lessee for the lease term.

Using the spreadsheet Journal Entries, prepare the journal entries for the lessee for 2018 and 2019 to record the lease agreement and all expenses related to the lease. Assume the Lessee’s annual accounting period ends on December 31 and that reversing entries are used when appropriate.

Prepare journal entries for the lessor of the transaction.

Carrying Amount of Lease nterest hi Date Initial Lease Amount

Answer 1

Solution:

It is given that 'The asset will revert to the lessor at the end of the lease term', so we can presume it to be operating lease since the right to asset still lies with the lessor.