Reference no: EM133127624
Question - On January 1, 2020, Lessee Corp. leases a building from Lessor Corp. The following is a summary of information about the lease and the leased building.
Lease term: 5 years with no options for renewal
Lessee Corp.'s incremental borrowing rate: 4.5%
Annual lease payments: $1,100,000
Remaining economic life of the building: 35 years
Payment date: First payment Jan 1, 2020, and after that each December 31
Purchase option: None
Fair value of the underlying asset: $40,000,000
Additional information:
The rate implicit in the lease that Lessor Corp charges Lessee Corp. is not readily determinable by Lessee Corp.
Title to the building remains with Lessor Corp throughout the period of the lease and upon lease expiration.
Lessee Corp. does not guarantee the residual value of the building.
Lessor Corp pays Lessee Corp. $125,000 prior to the lease commencement date for packing and moving expenses as a lease incentive.
Required -
1. Is this an operating lease or a finance lease to the lessee? Use all the lease criteria classification to answer the question.
2. Prepare a lease liability amortization schedule and right-of-use asset amortization schedule for the lessee.
3. Provide all journal entries associated with this lease for the lessee for the years ended December 31, 2020, and 2021.
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