Reference no: EM133169899

Question - Firm A, a leasing company, leased a piece of equipment to firm B. The following is the lease term. Answer all the questions.

Lease period: 3 years, beginning on 1 Jan 2018.

Periodic payment: 10,000 payable annually in advance.

The first lease payment is on 1 Jan 2018 & the remaining two subsequent lease payments are on each reporting date (i.e., reporting date, 31 Dec)

The estimated useful life of the leased equipment is 5 years.

The lessee will return the leased equipment to the lessor at the end of the lease term.

The expected residual value of the leased equipment at the end of the lease term is 3,000.

Guaranteed residual value: 5,000.

Implicit interest rate: 8%

Incremental borrowing rates: 10%

The lessee does not know the implicit interest rate.

The lessee uses the straight-line depreciation method for the leased asset.

Required -

1. Calculate the lessee's lease liability for the initial recognition of the finance lease. Show your calculation process.

2. For the lessee, what is the depreciation period? What is the depreciation expense for 2018?

3. Prepare the lessee's journal entries for the finance lease for 2019.