Question

Part V: Lessee and Lessor enter into a lease agreement on January 1, 2019, for equipment. The following data are relevant to the lease agreement: 1. The term of the non-cancelable lease is 5 years. Payments of $13,000 including executory costs of $3,000 are due at the end each year. 2. The equipment has an economic life of 10 years with a residual value of $15,000 at the end of the lease, but not guaranteed. The equipment's fair value equals its cost of $49,970. 3. Lessee depreciates similar machinery it owns on the straight-line basis. 4. Lessee's incremental borrowing rate is 9% per year. Lessee is aware that the lessor used an implicit rate of 6% in computing the lease payments. The collectability of the lease payments is probable for the lessor. INSTRUCTIONS: (a) Indicate the type of lease to the Lessee and Lessor. (b) Prepare the journal entries on the books of Lessee and Lessor through December 31, 2023.

Answer 1

(a). It is a operating lease for both the lessor and lessee .because

this lease agriment is not satisfing any one of the capital lease conditions.

the conditions of the capital lease are as follows

1.ownership transfer at the end of the lease.

2.written option for bargain purchase.

3.90% of the leased property FV less than PV of future minimum lease payments.

4.75% of economic life of the asset is being commited in lease term.

any of these conditions are not satisfied this lease so ,this is a operating lease for both lessor and lessee.

(b). journal entries inthe books of lessee are as follows,

debit credit   

31-12-2019 lease expenses 10000

exicutery cost 3000

cash 13000

31-12-2020 lease expenses 10000

exicutery cost 3000

cash 13000

31-12-2021 lease expenses 10000

exicutery cost 3000

cash 13000

31-12-22 lease expenses 10000

exicutery cost 3000

cash 13000

31-12-23 lease expenses 10000

exicutery cost 3000

cash 13000

journal entries in the books of lessor are as follows,

31-12-2019 cash 13000

rent income 13000   

same entry until 31-12-2022.