Reference no: EM132739355
Problem - Spring Manufacturing Corp. (SMC), a publicly accountable entity, leased equipment from Lessor Co., also a publicly accountable entity, on December 31, 2018. Details of the lease are as follows:
Fair value of equipment leased at lease date $160,000
Lease term 8 years
Economic life of equipment 12 years
Residual value at end of lease term $20,000
Residual value at the end of economic life $5,000
SMC's incremental borrowing rate 6%
Interest rate implicit in the lease (known to SMC) 7%
At the end of the lease term, the equipment will be returned to Lessor Co. The first lease payment was due, and paid, on December 31, 2018.
Required -
a) Calculate the amount of the lease payment required by Lessor Co.
b) Determine whether the lease is an operating or a finance lease from the perspective of Lessor Co.
c) Briefly describe how SMC should account for this lease.
d) Assume that, from SMC's perspective, this is a finance lease. Prepare the journal entries that SMC should record for the years ended December 31, 2018, and December 31, 2019.
e) Prepare the presentation of the lease obligation for SMC's statement of financial position at December 31, 2019.
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