Reference no: EM132642084

Question - On January 1, 2020, Better, Inc. entered into an equipment lease with Canyon Corp. under which Better agrees to lease equipment that was manufactured by Canyon and that has an expected useful life of 4 years. The cost to manufacture the equipment was $500,000 and its normal sales price is $600,000. The lease term is 3 years and Canyon expects to recover the equipment's normal sales price through 3 lease payments in order to earn an 8% rate of return. The residual value is expected to be $53,000. Better doesn't guaranteed the residual value. The lease payment is due at lease signing date and each of the following December 31. Better is aware of Canyon's expected rate of return and normally amortizes the assets by the straight-line method. Canyon is reasonably confident that Better will make the lease payments and has no material uncertainties. Round your numbers to the nearest whole numbers.

Required -

1. Calculate the annual lease payment.

2. According to the FASB, how should the lease be classified by both Better (lessee) and Canyon (lessor)? Why?

3. Calculate the present value of lease liability and lease receivable on lease signing date.

4. Prepare lease amortization schedules up to 12/31/2020 for both better and Canyon.

5. Prepare the journal entries to record the inception of the lease and the first lease payment on January 1, 2020 for both Better and Canyon.

6. Prepare the appropriate journal entries for both Better and Canyon at December 31, 2020.

7. Suppose at the end of the lease term, the actually residual value is $40,000 when the equipment is reverted back to lessor. State whether or not there will be any gain or loss occur to lessee and lessor.