Epps Corp., a public company, leased equipment from AndersonInc. on January 2, 2018, for a period of three years. Leasepayments of $100,000 are due to Anderson Inc. each year on December31. The lease contains no purchase or renewal options and theequipment reverts back to Anderson Inc. on the expiration of thelease. The remaining useful life of the equipment is four years(the equipment is new at the time Epps leases it). The fair valueof the equipment at lease inception is $270,000. Epps Corp. hasguaranteed $20,000 as the residual value at the end of the leaseterm. The $20,000 represents the expected value of the leasedequipment to the lessee at the end of the lease term. The salvagevalue of the equipment is expected to be $2,000 after the end ofits economic life. Epps’ incremental borrowing rate is 9 percent.Anderson’s implicit rate is 10 percent and is known by Epps.

The assistant controller  and controller of Epps Corp.analyzed the lease and made their recommendations for theappropriate accounting.. As the CFO, you were given both analysesto determine the correct accounting treatment. Calculations andjournal entries performed by the assistant controller andcontroller are below.

Assistant controller analysis:

Since the equipment reverts back to Anderson Inc., Epps shouldnot record an asset or liability on the lease.

Entries to be posted in Years 1, 2, and 3:

Dr. Leaseexpense                           $100,000

Cr.Cash                                                        $100,000

Controller analysis:

The lease term is for three years. Since it is long-term, anasset and liability must be recorded. The amount of the asset andliability is based on the present value of the lease payments. Thecontroller uses Epps’ incremental borrowing rate since it is thelower rate.

Present value of the lease payments = $100,000 × 2.53129 =$253,129

Since interest has to be charged on the straight-line method,the controller determines the following for the amortization of thelease liability.

                                                                                                Reductionin             Balanceof

                                                                 Interest                     Lease                         Lease

  Year             CashPayment             Expense                  Obligation               Obligation

    0                                                                                                                              $253,129

    1                  $100,000                        $15,624                $84,376                     $168,753

    2                  $100,000                        $15,624                $84,376                     $  84,377

   3                  $100,000                        $15,623                $84,377                     $           0

Journal entries in Year 1:

January 2

LeasedAsset                                   253,129

            LeaseObligation                                                    253,129

December 31

Interestexpense                             15,624

Leaseobligation                             84,376

Cash                                                              100,000

DepreciationExpense                     84,376

             AccumulatedDepreciation                          84,376        

Required:

1. Was the assistant controller’s analysis correct? Why or whynot?

2. Was the controller’s analysis correct? Why or why not?

3. If neither answer is correct, show the correct analysisincluding all year one entry(ies).

Be sure to provide appropriate authoritative sources forpositions taken.