Reference no: EM133188866

Question - Amsterdam Leasing Company agrees to lease machinery to Harrisburg Corporation on January 1, 2019. The following information relates to the lease agreement. The term of the lease Is 7 years with no renewal option, and the machinery has an estimated economic life at 9 years. The asset Is not of a specialised nature. The machinery cost is $525,000 and the fair value of the asset on January 1. 2019 is $700,000. At the end of the lease term, the asset reverts to lessor and has a guaranteed residual value of $50,000 and Harrisburg estimates the expected residual value at the end of the lease term wllbe $50,000. Harrisburg amortizes all at its leased equipment on the straight-line basis. The lease agreement requires equal at $109,365, beginning on January 1, 2019. The lessor believes the collectability of the lease payments is probable. Amsterdam desires a rate of return of 5% on Its Investments. Harrisburg's Incremental borrowing rate is 6%. and the lessons incremental implicit rate is unknown.

Required -

1. Using the lease classification tests, determine the nature of this lease for the lessee.

2. Compute the value of the lease liability to the lessee.

3. Prepare the Journal entries for Harrisburg for 2019 and 2020 related to the lease arrangements.

4. Suppose Harrisburg estimates the res lduai value at the end of the lease term to be $40,000, but still guarantees a residual of $50000. Compute the value of the lease liability at lease commencement.