Reference no: EM133026558
Question - Shuri Laboratories in Wakanda are the sole manufacturers of Kimoyo Beads, a wearable home-automation and communication smart technology. On January 1, 2023, Shuri signs a contract (renewable annually) to lease the technology to the T'Challa Organization for up to 6 years. There is, however, a penalty of $2000 for non-renewal. At lease signing, the market value of the beads is $600,000 (with a production cost of $420,000) and they have an estimated life of 6 years. The market value of the beads is expected to depreciate by $80,000/year until the end of the asset's life (when they are expected to have a salvage value of $120,000). T'Challa has the option to purchase the beads for $220,000 at the end of year 5. T'Challa guarantees that the asset will have a residual fair market value of at least $150,000 at the end of the lease.
The lease requires equal annual payments beginning on January 1, 2023. Shuri's expected rate of return on the financing aspect of the lease is 10% and T'Challa's incremental borrowing rate is 8%, however, T'Challa is aware of the implicit rate used by Shuri. Both Shuri and T'Challa use a December 31 year-end.
Provide both sides: lessee and lessor
-Classify the lease. Show all criteria, calculations, and whether each criteria was met.
-Provide the journal entry/entries to be recognized at lease inception.
-Complete the schedule that will be used to amortize the lease receivable.
-Provide all entries to be made by both in year 3 of the lease.
-Provide all entries to be made at lease termination if, on that date, the actual residual value of the Kimoyo beads is $110,000.Provide lessor's side
-Provide all entries to be made by the lessor at lease termination if, on that date, the actual residual value of the Kimoyo beads is $175,000. Provide lessee's side
-Provide all entries to be made by the lessee at lease termination if, on that date, the actual residual value of the Kimoyo beads is $0.
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