Reference no: EM132611268

Question - FHA is a private corporation adhering to ASPE, enters into a non-cancellable lease agreement on July 1, 2017, to lease equipment from EP Ltd. Selected details relevant to the lease agreement are below:

1. The term of the lease is 4 years, with no renewal option. Payments of $126,807 are due on June 30 of each year, with the first payment due June 30, 2018.

2. The fair value of the equipment on July 1, 2017 is $420,000. The equipment has an economic life of 6 years with no residual value.

3. FHA depreciates similar equipment it owns on the straight line basis

4. FHA's incremental borrowing rate is 10%. The lessee is aware that the lessor used an implicit rate of 8% in calculating the lease payments.

5. Present value factor for 4 periods at 8% is 3.31213; at 10%, 3.16986.

6. Maintenance expenses paid separately to EP amount to $3,500 / month paid annual at the beginning of the lease.

Required -

a) What type of lease this is for FHA? Explain your rationale using all ASPE tests?

b) Prepare the journal entries on FHA's books that relate to the lease agreement for the following dates. Round all amounts to the nearest dollar. Show your calculations.

i. July 1, 2017

ii. December 31, 2017