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Oscar, Inc., leased equipment from Reynolds Company on January 1, 2023. Reynolds manufactured the equipment...

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Accounting

Oscar, Inc., leased equipment from Reynolds Company on January 1, 2023. Reynolds manufactured the equipment at a cost of $200,000. The equipment has a fair value of $260,000.

Information related to the lease appears below:

Lease term: 5 years

First lease payment: January 1, 2023

Subsequent lease payments: December 31, 2023, 2024, 2025, 2026

Economic life of the equipment: 6 years

Estimated value of equipment at end of economic life: $0

Purchase option, reasonably expected to be exercised by Oscar: $20,000

Implicit and incremental borrowing rate 8%

Required:

  1. Determine the amount of the annual payments using Time Value of Money Tables. Show computations.
  2. Apply the lease classification criteria to this lease. From the lease criteria, determine the lease categorization for Oscar, the lease and Reynolds, the lessor.
  3. Prepare the entries to record the lease and the first payment for both the lessee and the lessor on January 1, 2023
  4. Prepare an amortization table for the lessee and the lessor for the term of the lease
  5. Prepare all the required journal entries for Oscar & Reynolds on December 31, 2023.
  6. Prepare all required Jornal entries for Oscar and Reynolds on December 31, 2027, the end of the lease term.

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