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Compute the annual lease payment

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Reference no: EM132326117

Assignment

Lessor Sales Company and Lessee Manufacturing Company agreed to a noncancelable lease. The following information is available to both entities regarding the lease terms and the leased asset.

1. Lessor's cost of the leased asset was $30,000. The asset was new at the inception of the lease term.

2. Lease term is three years starting January 1, 2020.

3. Estimated useful life of the leased asset is six years. Estimated residual value at end of six years is zero.

4. On January 1, 2023, the estimated unguaranteed residual value of the leased asset one day after the end of the lease term is $10,000.

5. Lessor's implicit rate is 7%.

6. Lessee's incremental borrowing rate on January 1, 2020, is 8% and the lessee is unaware of the lessor's implicit rate.

7. Title to the leased asset is retained by the lessor

8. The fair value of the leased asset on January 1, 2020, is $45,000.

9. Three annual lease payments are due on January 1 of each year during the lease term, and the first payment is due at the inception of the lease term.

10. The accounting period for the lessor and the lessee ends on December 31.

Required

a. Compute the annual lease payment.

b. What type of lease is this for the lessee and lessor?

c. Provide all journal entries associated with this lease for the lessee for the years ended December 31, 2020, and 2021.

d. Provide all journal entries associated with this lease for the lessor for the years ended December 31, 2020, and 2021.

Reference no: EM132326117

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