Reference no: EM132899676

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. Make an amortization schedule for the lessor.

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