ANTM Lease and BHP Ltd. sign a lease agreement dated 1January 2019, that calls for ANTM
to lease a backhoe to BHP beginning January 1, 2019. The agreementasks ANTM Lease give
the right use of a backhoe to BHP for the periods of 1 January 2019to 1 January 2024.
The terms and provisions of the lease agreement and other pertinentdata are as follows:
1. The term of the lease is five years. The lease agreement isnon-cancelable, requiring
equal rental payments of $17,500 at the end of each year/31December (annuity-due
basis).
2. The backhoe has a fair value at the commencement of the lease of????, an estimated
economic life of five years, and a guaranteed residual value of$4,000. (BHP expects
that it is probable that the expected value of the residual valueat the end of the
lease will be greater than the guaranteed amount of $4,000.)
3. The lease contains no renewal options. The backhoe reverts toANTM Lease at the
termination of the lease.
4. BHP incremental borrowing rate is 4 percent per year.
5. BHP depreciates its equipment on a straight-line basis.
6. ANTM sets the annual rental rate to earn a rate of return of 5percent per year; BHP is
aware of this rate.
Instructions:
a. Determine who is the lessee and lessor.
b. Determining the value of right-of-use asset and lease liabilityfor lessee.
c. Journals on the date of beginning of the agreement forlessee.
d. Prepare the table of payments and interest expense forlessee.
e. Prepare the journal to recognize interest expense, depreciationexpense at the end of
years, and payments made during the lease agreement.
f. Compute the fair value of the backhoe for the lessor at thebeginning of the contract;
and prepare the table and journal needed by the lessor during thelease agreement.
g. If the fair value of the backhoe is $1,000 at the end of thelease agreement, prepare the
journal entry on 1 January 2024 for lessee and lessor.