Reference no: EM132896250
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 lathe to lessor $140,000
Pranav's normal selling price for lathe $178,268
Useful life 7 years
Estimated value at end of useful life $8,000
Lease provisions
Lease term 5 years
Payment frequency Annual
Start date of lease January 1
Payment timing December 31
Estimated residual value at end of 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 end of lease term, title does not transfer to 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.
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