Reference no: EM132936443
Problem - Lease Accounting - Truefont Publishing enters into a lease agreement with Elkert Auto Mall to lease a cargo van with a fair value of $75,000 under a 5-year lease on December 20, 2019. Elkert provides Truefont Publishing with a lease incentive in the amount of $6,000 in cash to terminate another lease. The lease commences on January 1, 2020, and Truefont will return the cargo van to Elkert at the end of the five-year lease. This is an annuity in advance (or beginning mode). The cargo van has an estimated useful life of 7 years. Truefont made a lease prior down payment of $10,000 on December 20, 2019, the day of signing. In addition, the lease agreement stipulates annual payments of $10,000, and for convenience are due on December 31 of 2019, 2020, 2021, 2022, and 2023. The lease does not contain any transfer of ownership or purchase option provisions. There is no lessee guaranteed residual value. The cargo van is taken from the dealer's existing stock. The implicit rate of the lease is 7% and is known by Truefont. Truefont incurs initial direct costs of $2,000.
(a) From the lessee's viewpoint, what kind of lease is the above agreement (Operating or Finance Lease)? Show all criteria for this decision. You should use the FASB's recommended guidelines (i.e., 75% and 90%).
(b) What is the measurement of the Lease Liability and the Right-of-Use Asset?
(b) Prepare the lease amortization table related to this lease for the first three years.
(c) What journal entries should be recorded by Truefont on December 31, 2019?
(d) What journal entries should be recorded by Truefont on December 31, 2020?
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