Reference no: EM132825522

Question - On January 1, Year 1, Company A (the lessee) entered into an 8-year lease agreement with Company B (the lessor) for industrial equipment. Annual lease payments of $14,378 are payable at the end of each year. Company A's incremental borrowing rate is 7%, and the implicit rate in the lease is 5%, which is known to Company A. On January 1, Year 1, the fair value of the equipment is $125,000 and its estimated useful life is 15 years. Company A depreciates its long-lived assets in accordance with the straight-line depreciation method. At lease commencement date, Company B estimates that the total residual value of the equipment at the end of the lease term will be $47,388. Company A guarantees $40,000 of the residual value of the equipment. However, due to expected high usage of the equipment, Company A estimates that the value of the equipment at the end of the lease term will be only $30,000. Information on present value factors is as follows:

Present value of $1 at 5% for 8 periods 0.6768 Present value of $1 at 7% for 8 periods 0.5820 Present value of an annuity of $1 at 5% for 8 periods6.4632 Present value of an annuity of $1 at 7% for 8 periods 5.9713

Required -

1. Calculate the discount rate for the lease used by Company A.

2. Calculate classification of the lease by Company A.

3. Calculate the amount at which the lease liability was recognized in Company A's financial statements at the lease commencement date.

4. Calculate the amount of interest expense recognized by Company A in Year 1.

5. Calculate the carrying amount of the right-of-use asset in Company A's December 31, Year 1, financial statements.

6. Calculate the amount of Company A's lease liability on December 31, Year 1, after the first required payment was made.

7. Calculate the amount of the current portion of the lease liability as it is presented in Company A's December 31, Year 1, financial statements.