Reference no: EM133164750
Question - Potts Company signs an agreement on January 1, 2016, to lease equipment to Plote Company. The following information relates to this agreement.
a. The term of the non-cancelable lease is 5 years with no renewal option. The equipment has an estimated economic life of 6 years.
b. The fair value of the asset at January 1, 2016 is $80,000.
c. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $7,000, none of which is guaranteed.
d. Plote Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) $900 to Rocky Mountain Insurance Company for insurance and (2) $1,600 to Laclede County for property taxes.
e. The agreement requires equal annual rental payments beginning on January 1, 2016.
f. The lessee's incremental borrowing rate is 12%. The lessor's implicit rate is 10% and is known to the lessee.
g. Plote Company uses the straight-line depreciation method for all equipment.
h. Plote uses reversing entries when appropriate.
Required -
(a) Calculate the amount of the annual rental payment required by the lessor.
(b) Prepare all of the journal entries for the lessee for 2016 and 2017 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee's annual accounting period ends on December 31.