Reference no: EM132892046
Problem - Various Lease Issues for Lessor and Lessee - Lessee Company leases heavy equipment on January 1, 2019, from Lessor Company with the following lease provisions:
The lease is noncancelable and has a term of 10 years.
The lease does not contain a renewal or bargain purchase option.
The annual rentals are $27,653.77, payable at the beginning of each year.
Lessee agrees to pay all executory costs directly to a third party.
The interest rate implicit in the lease is 12%, which is known by Lessee.
The residual value of the property at the end of 10 years is estimated to be zero.
The cost of the equipment to the lessor is $175,000. The fair value is 190,000.
The lessor incurs no material initial direct costs.
The lessor expects to collect all lease payments.
Lessee's incremental borrowing rate is 15%, and it uses the straight-line method to record depreciation on similar equipment.
On December 1, 2019, the lessee pays insurance of $1,900, property taxes of $1,300, and maintenance of $600.
On December 1, 2020, the lessee pays insurance of $1,800, property taxes of $1,200, and maintenance of $500.
Required -
1. Identify the type of lease involved for the lessee and the lessor, and give reasons for your classifications.
2. Prepare all the journal entries for both the lessee and the lessor for 2019 and 2020.