Reference no: EM131797962

Problem - The following facts pertain to a non-cancelable lease agreement between December Leasing Company and Fayett Electronics, a lessee, for a computer system.

Inception date:	October 1, 2007
Lease term:	6 years
Economic life of lease equipment:	6 years
Fair value of asset at October 1, 2007:	$901,149
Residual value at end of lease term:	0
Lessor's implicit rate:	10%
Lessee's incremental borrowing rate:	10%
Annual lease payment due at the beginning of each year,
beginning with October 1, 2007:	$188,100

The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs, which amount to $16,500 per year, and are paid each October 1, beginning October 1, 2007. (This $16,500 is not included in the rental payment of $188,100.) The asset will revert to the lessor at the end of the lease term. The straight-line depreciation method is used for all equipment.

The following amortization schedule has been prepared correctly for use by both the lessor and the lessee in accounting for this lease. The lease is to be accounted for properly as a capital lease by the lessee and as a direct-finance lease by the lessor.

Date:	Annual lease Payment / Receipt:	Interest (10%) on Unpaid Liability / Receivable:	Reduction of Lease Liability / Receivable:	Balance of Lease Liability / Receivable:
10/01/07				901,149.00
10/01/07	188,100.00		188,100.00	713,049.00
10/01/08	188,100.00	71,304.90	116,795.10	596,253.90
10/01/09	188,100.00	59,625.39	128,474.61	467,779.29
10/01/10	188,100.00	46,777.93	141,322.07	326,457.22
10/01/11	188,100.00	32,645.72	155,454.28	171,002.94
10/01/12	188,100.00	17,097.06	171,002.94	0.00
	1,128,600.00	227,451.00	901,149.00

Instructions:

(a) Assuming the lessor's accounting period ends on September 30, answer the following questions with respect to this lease agreement:

(1) What items and amounts will appear on the lessor's income statement for the year ending September 30, 2008?

(2) What items and amounts will appear on the lessor's balance sheet at September 30, 2008?

(3) What items and amounts will appear on the lessor's income statement for the year ending September 30, 2009?

(4) What items and amounts will appear on the lessor's balance sheet at September 30, 2009?

(b) Assuming the lessor's accounting period ends on December 31, answer the following questions with respect to this lease agreement:

(1) What items and amounts will appear on the lessor's income statement for the year ending December 31, 2007?

(2) What items and amounts will appear on the lessor's balance sheet at December 31, 2007?

(3) What items and amounts will appear on the lessor's income statement for the year ending December 31, 2008?

(4) What items and amounts will appear on the lessor's balance sheet at December 31, 2008?