Question

On January 1, 2016, Ballieu Company leases specialty equipment with an economic life of 8 years to Anderson Company. The lease contains the following terms and provisions:

•	The lease is noncancelable and has a term of 8 years.
•	The annual rentals are $31,000, payable at the beginning of each year.
•	The interest rate implicit in the lease is 12%.
•	Anderson agrees to pay all executory costs and is given an option to buy the equipment for $1 at the end of the lease term, December 31, 2024.
•	The cost of the equipment to the lessor is $162,500, and the fair retail value is approximately $172,500.
•	The lessor incurs no material initial direct costs.
•	The collectibility of the rentals is reasonably assured, and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor.
•	The lessor estimates that the fair value is expected to be significantly greater than $1 at the end of the lease term.

The lessor calculates that the present value on January 1, 2016 of 8 annual payments in advance of $31,000 discounted at 12% is $172,476.47 (the $1 purchase option is ignored as immaterial).

Required:

1.	Next Level Identify the classification of the lease transaction from Ballieu’s point of view.
2.	Prepare all the journal entries for Ballieu for the years 2016 and 2017.

Answer 1