Please answer all steps as this is all one question! Will upvote!! Lessor and lessee agreed to a noncancelable lease for which the following information is available.
- The underlying asset with a fair value of $25,000 was new at the inception of the lease term.
- Lease term is four years starting January 1 of Year 1.
- Estimated useful life of the underlying asset is eight years.
- On January 1 of Year 1, lessor and lessee estimated that the residual value of the underlying asset will be $9,000 on the purchase option date and zero at the end of its useful life. The residual value is not guaranteed.
5. Lessee's incremental borrowing rate is 7%.
6. Lessor's interest rate implicit in the lease is 7%.
7. Purchase option price of the underlying asset exercisable on January 1 of Year 5 is $9,000. It is not reasonably certain that the lessee will purchase the asset at the end of the lease at the purchase option, which equals the estimated residual value.
8. Title to the underlying asset is retained by the lessor unless the purchase option is exercised.
9. Sales value of underlying asset on January 1 of Year 1 is $30,000.
10. Four annual lease payments will be made each January 1 during the lease term, and the first payment is due at inception of the lease term.
Required
a. Calculate the annual lease payment calculated by the lessor.
b. Is this an operating lease or a finance lease to the lessee?
C. Prepare a lease liability schedule and right-of-use asset schedule for the lessee for the first two years of the lease term.
d. Provide journal entries for the lessee on January 1 and December 31 of Year 1 and Year 2.
Lessor and lessee agreed to a noncancelable lease for which the following information is available. 1. The underlying asset with a fair value of $25,000 was new at the inception of the lease term. 2. Lease term is four years starting January 1 of Year 1. Problem 17.95 Recording Entries for Operating Lease - le LO5 3. Estimated useful life of the underlying asset is cight years. 4. On January 1 of Year 1 , lessor and lessee estimated that the residual value of the underlying asset will be $9,000 on the purchase option date and zero at the end of its useful life. The residual value is not guaranteed. 5. Lessee's incremental borrowing rate is 7%. 6. Lessor's interest rate implicit in the lease is 7%. 7. Purchase option price of the underlying asset exercisable on January 1 of Year 5 is $9,000. It is not reasonably certain that the lessee will purchase the asset at the end of the lease at the purchase option, which equals the estimated residual value, 8. Tide to the underlying asset is retained by the lessor unless the purchase option is exercised. 9. Sales value of underlying asset on January 1 of Year 1 is $30,000. 10. Four annual lease payments will be made each January I during the lease term, and the first payment is due at inception of the lease term. a. Calculate the annual lease payment calculated by the lessor. b. Is this an operating lease or a finance lease to the lessee? c. Prepare a lease liability schedule and right-of-use asset schedule for the lessee for the first two years of the lease term. d. Provide journal entries for the lessee on January 1 and December 31 of Year 1 and Year 2
