SOLVED

20) Salisbury Creamery leases its ice cream making equipment from Little Rock Finance Company under the following lease terms: Â ?The lease term is five years, non-cancellable, and requires equal rental payments of $56,926 due at the beginning of each year starting January 1, 2016. ?Upon inception of the lease on January 1, 2016, Little Rock purchased the equipment at its fair value of $280,000 and immediately transferred it to Salisbury Creamery. The equipment has an estimated economic life of five years, and a $20,000 residual value that is guaranteed by Salisbury Creamery. ?The lease contains no renewal options, and the equipment reverts to Little Rock Finance Company upon termination of the lease. ?Salisbury’s incremental borrowing rate is 4%; the rate implicit in the lease is also 4%. ?Salisbury depreciates similar equipment that it owns on a straight-line basis. ?Both companies have December 31 year-ends. Required: a. Evaluate how the lessee should account for the lease transaction. b. Evaluate how the lessor should account for the lease transaction. c. Prepare the lessee’s amortization schedule for this lease. d. Prepare the journal entries on January 1, 2016 for both parties. e. Prepare the journal entries on December 31, 2016 and January 1, 2017 for both parties. 21) Here are the terms of a lease agreement: Fair value of leased asset 65,000 Lease term 10 years Payment frequency Annual Payment timing End of year Guaranteed residual value 0 Interest rate implicit in lease (known to lessee) 4% Lessee’s incremental borrowing rate 4% Required: Determine the amount of lease payment that the lessor would require to lease the asset.