Reference no: EM132613972

Question - On June 1, 2021, James Ltd. (the lessee) enters into an agreement to lease office equipment from McCollum Co. (the lessor). Both companies report using ASPE.

Additional information:

1. The lease term is 5 years and is non-cancellable. The annual payments of $24,007 are due on June 1 of each year, beginning in 2021.

2. The fair value of the equipment on June 1, 2021 is $100,000. The equipment has an economic life of 7 years with no residual value after 7 years.

3. The lessee depreciates similar office equipment using the straight-line method.

4. Included in the lease payment is executory costs of $2,000 for insurance.

5. The lessee's incremental borrowing rate is 9% per year. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease payments.

6. Title does not transfer to the lessee and there is no bargain purchase option.

7. The equipment has a residual value after 5 years of $7,500, which is guaranteed by James Ltd.

8. The original cost of the equipment to McCollum Co. was $80,000.

The credit risk of the lessee is considered normal and there are no cost uncertainties for the lessor.

Required -

a. Determine what type of lease this is for both companies using appropriate criteria.

b. Pass all journal entries required by James Ltd. for this lease from June 1, 2021 to December 31, 2021, the company's fiscal year end.

c. Pass all journal entries required by McCollum Co. for this lease from June 1, 2021 to December 31, 2021, the company's fiscal year end.

d. Make a partial balance sheet at December 31, 2021 for James Ltd. to reflect the presentation of all lease-related accounts.

e. Prepare a partial income statement for the year ended December 31, 2021 for McCollum Co. to reflect the presentation of all lease-related accounts.