Reference no: EM132793346
The information below relates to a leasing arrangement between Frankfield. Leasing Company and Boswell Manufacturing Company, a lessee.
Inception date January 1, 2020
Lease term (non cancellable) 5 years
Annual lease payment due at the beginning of each
year beginning January 1, 2020 $28,500
Fair value of asset at January 1, 2020 $130,000
Economic life of leased equipment 6 years
Residual value of equipment at end of lease term,
unguaranteed by the lessee $25,270
Lessor's implicit rate (not known by the lessee) 6%
Lessee's incremental borrowing rate 8%
The asset will revert to the lessor at the end of the lease term. There is an expected residual value of $25,270 which is unguaranteed by the lessee. The lessee uses the straight-line depreciation method for all equipment.
Instructions
Problem (i) What is the lease liability for Boswell Manufacturing Company?
Problem (ii) Record the lease on Boswell's books at the date of inception.
Problem (iii) Record the first year's depreciation on Boswell's books.
Problem (iv) Record interest expense and lease liability for Boswell Company for the year ending December 31, 2020.
Problem (v) Discuss the nature of this lease to Frankfield Leasing Company. (Explain the rationale for your answer)
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