Reference no: EM132354256
Question
You need help with the following question:
How do you prepare the journal entries relating to the lease for Emmett Engineering Inc. for 2018.
What amounts will be shown on Emmett Engineering Inc.'s statement of financial position as at December 31, 2018, as a result of this lease?
How do you determine the classification of the lease by Lisa's Leasing Ltd.
How do you prepare the journal entries relating to the lease for Lisa's Leasing Ltd. for 2018?
And, what amounts will be shown on Lisa Leasing Ltd.'s statement of financial position as at December 31, 2018, as a result of this lease?
The following information is given.
Emmett Engineering Inc. entered into a lease with Lisa's Leasing Ltd. to lease some highly specialized equipment that has a fair value of $900,000.
The expected useful life of the equipment is 15 years, after which time the equipment is expected to be obsolete. The lease began on March 1, 2018, and is for twelve years. Annual lease payments are $100,000, payable on March 1 of each lease year. The equipment is expected to have a fair value of $216,825 at the end of the lease. This value has not been guaranteed by Emmett Engineering Inc.
After the initial term of the lease, Emmett has the option of renewing the lease on a year by year basis for $2,500 per year for as long as Emmett wishes. Since the equipment will be obsolete by that time, this is considered to be a fair rental for equipment of that age.
Emmett's incremental borrowing rate is 6%. The implicit rate of the lease is 8%, but this rate is not known to Emmett. Lisa's Leasing Inc. considers the risk of default by Emmett to be low and anticipates no unrecoverable costs. Emmett will amortize the equipment on a straight-line basis.
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