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On January 1, 2021, ACME Incorporated, a publicly traded company, signed a 5-year, non-cancellable lease...

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Accounting

On January 1, 2021, ACME Incorporated, a publicly traded company, signed a 5-year, non-cancellable lease agreement to lease equipment from Lessor Ltd. The details of the agreement are as follows:

1. Yearly rental payments due January 01 each year of $150,000.
2. Initial lease term: 5 years.
3. Estimated economic life of leased equipment: 10 years.
4. Equipment fair value at January 01, 2021: $661,000.
6.

The equipment has a residual value of $15,000 at the end of the lease,

which is not guaranteed by ACME.
7. At the end of the lease the equipment will be returned to the lessor.

Additional information:

  • ACME's incremental borrowing rate is 10%.
  • The rate implicit in the lease is 11% and it is not known to ACME.
  • The interest rate implicit in the lease is not known to ACME.

Required (round calculation to four decimal places and final answers to the nearest dollar):

  1. How will the lease be classified by the lessor assuming that the company follows ASPE. Support your answer.
  2. Assuming the lease is classified as a direct financing lease by the lessor prepare the journal entries for 2022.

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