Question

Reporting Operating Lease-Lessor Renewable Co. uses leasing as a secondary means of selling its products. The company contracted with Green Corporation to lease a machine with an economic life of 12 years to be used by Green Corporation in its operations. The fair value of the asset at the inception of the lease was $400,000; it cost Renewable Co. $360,000 and is carried as equipment at that value. Payments of $44,925 are to be made by Green Corporation at the beginning of each of the eight years of the lease. Renewable Co.'s implicit interest rate is 6% per year, which is not known by Green Corporation. Green Corporation's incremental borrowing rate is 7%. Renewable Co. estimates the residual value of the leased asset to be $166,217 at the end of the lease term. The residual value is not guaranteed by Green Corporation. Renewable Co. will depreciate the equipment on a straight-line basis (assume no salvage value). a. How would Renewable Co. classify the lease? Operating Lease b. What balances (account titles, amounts) appear on Renewable's balance sheet at the end of the first year, related to the lease? • Note: Round your final answers to the nearest whole dollar. • Note: Do not use negative signs with your answers. End of Year One Balance Sheet Assets Noncurrent Assets Equipment S0x Accumulated depreciation 0x Net equipment c. What balances (account titles, amounts) appear on Renewable's income statement for the first year, related to the lease? • Note: Round your final answers to the nearest whole dollar. • Note: Do not use negative signs with your answers. Year One Income Statement Revenues Cost of Goods Sold Expenses Lease Receivable $ 0x . *$ 0x Check

Answer 1

End of Year One Balance Sheet Assets Non current Assets Equipment Accumulated Dep Net Equipment $ $ $ 4,00,000 50,000 3,50,000 Accumulated dep = Cost of Asset - Residual Value life of asset $400,000 - 0 8 years = $ 50,000 Year One Income statement Revenues Lease income Expenses Depreciation $ 44,925 $ 50,000 Note: List of Items of Income statement was not present in the question hence made self assumption of the category. Please provide the items in the comment section in case of any problems. Will help accordingly.

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