Reference no: EM133117330
Question - On January 1, 2020, ABC, Inc. leased an asset from XYZ, Corp. for a period of 16 years. The contract requires XYZ to make annual payments at the beginning of each year of $26,725.
At the end of the contract period the asset will return to Lessor.
The asset cost ABC $160,000 to manufacture and has an expected useful life of 22 years. Its fair market value (sale price) at the time of the transaction was $230,000.
The present value of the lease payments for the lessor and the lessee was computed at the same rate of 11% and is equal to the fair value of the asset.
The first payment was made at the beginning of the lease.
Required -
1. How would ABC, Inc. classify this lease if it prepares its financial statements using the U.S. GAAP? Explain.
2. Prepare the necessary entries to record this lease on ABC's books on 1/1/2020.
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