Reference no: EM133095828
Question - On May 1, 2021, Linus Piano Company leased a machine from Lucy Corporation. Under the terms of the contract, annual lease payments are due on May 1 of each year, starting May 1, 2021. At the end of the lease term, the leased asset reverts back to Lucy Corporation. Linus has a December 31 year end and follows ASPE. Other terms of the lease are as follows:
Annual lease payment amount $31,050
Amount of residual value guarantee made by Linus Piano Company $9,750
Fair value of machine at inception of the lease $230,100
Fair value of machine at end of asset's economic life $4,600
Lease term (in years) 7
Estimated useful life of the machine (in years) 9
Linus Piano Company's incremental borrowing rate 6%
Interest rate implicit in the lease (this rate is known to Linus Piano) 5%
Required -
1. Calculate the present value of the minimum lease payments from the perspective of Linus Piano Company.
2. What kind of lease is this to Linus Piano Company? Why? Your answer should address all criteria that may be used to determine the type of lease.
3. Prepare an amortization schedule covering the first 3 lease payments.
4. Prepare any journal entries required for the Linus Piano Company on each of the following dates:
- May 1, 2021
- December 31, 2021
- May 1, 2022