Reference no: EM132864713

Question - Sarh Pieces Inc. creates aluminum alloy parts for commercial aircraft. In a recent transaction, Sarh leased a high-precision lathe machine from Pranav Revolving Corp. on January 1, 2019. The following information pertains to the leased asset and the lease agreement:

Cost of the lathe to lessor $140,000

Pranav's normal selling price for a lathe $178,268

Useful life 7 years

The estimated value at the end of useful life $8,000

Lease provisions:

Lease term 5 years

Payment frequency

Annual Start date of the lease

January 1 Payment timing December 31

Estimated residual value at the end of the lease (unguaranteed) $20,000

Interest rate implicit in the lease (readily determinable by lessee) 7%

The lathe machine will revert back to the lessor at the end of the lease term, the title does not transfer to the lessee at any time, and there is not a bargain purchase option.

Required -

a. Determine the amount of lease payment that the lessor would require to lease the asset to an outside party.

b. Classify this lease from the perspective of the lessor, Pranav Revolving Corp.

c. Prepare an amortization schedule for the lessor.

d. Prepare the journal entries on January 1, 2019, and December 31, 2019, for the lessor.