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Indicate the type of lease Jay has entered into and why

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Question - Jay Company, as lessee, enters into a lease agreement on January 1, 2020, to lease equipment. The following data are relevant to the lease agreement.

The term of the noncancellable lease is three years, with no renewal option. Payments of $12,000 are due on January 1, of each year.

The fair value of the equipment on January 1, 2020 is $35,000. The equipment has an estimated economic life of five years, and an unguarenteed residual value of $4,000.

The equipment reverts back to the lessor at the termination of the lease and is expected to have use to the lessor.

The lessee is aware that the lessor used an implicit rate of 6%.

Instructions -

1. Indicate the type of lease Jay has entered into and why (include a list of the Capital Lease Criteria)

2. Prepare the journal entries on Jay's books related to the lease agreement for the following dates: (round all amounts to the nearest dollar. Include a partial amortization schedule)

a. January 1, 2020

b. December 31, 2020

c. January 1, 2021

Reference no: EM132543246

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