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What is the classification of this lease and why

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Reference no: EM132959049

Problem - On January 1, 2020, Kara Danvers leased an airplane from Diana Prince. The lease terms are as below.

Lease Term (yrs) 10 Guaranteed Residual Value $0 Minimum Lease Payment $250,000 Expected Residual Value $300,000 Fair Value $2,000,000 Lessee Attorney Fees (on 1/1/2020) $15,000 Asset Cost (on Stitch's Books) $1,650,000 Ownership at End of Lease Diana Prince Asset Life (yrs) 15

If applicable, Diana Prince depreciates all assets on a straight-line basis. Kara Danvers uses 9% as its required rate of return when calculating lease returns. Diana Prince has an 10% imputed interest rate and Kara Danvers is aware of this. All amounts are paid on January 1 of each year. Both Danvers and Prince have December 31 year-ends.

REQUIRED - Answers the following for Kara Danvers:

1. What is the classification of this lease and why? (show all 5 tests)

2. What is the journal entry for January 1, 2020?

3. What is the journal entry for December 31, 2020?

4. What is the journal entry for January 1, 2021?

5. What is the journal entry for December 31, 2021?

Reference no: EM132959049

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