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What kind of lease is this to the lessee and lessor? What should be considered the lease term?

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Lessee Company on January 1, 2010, enters into a 6-year non cancelable lease, with two renewal options of one year each, for equipment having an estimated useful life of 10 years. Lessee's incremental borrowing rate is 10%. Lessee uses the straight-line method to depreciate its assets. The lease contains the following provisions;1. Rental payments of $80,000 including $8,000 for property taxes, payable at the beginning of each six month period.;2. The termination penalty assuring renewal of the lease for a period of two years after expiration of the initial lease term.;3. There is a bargain purchase option at the end of the lease for $40,000.;Collectibility of lease payments is reasonably predictable andno important uncertainties surround the amount of costs yet to be incurred by the lessor.;INSTRUCTIONS;(a) What kind of lease is this to the lessee and lessor? What should be considered the lease term?;(b) What journal entries woud lessee and lessor record during the first year of the lease? (Include an amortization schedule through 1/1/2011);(c) What journal entries would lessee and lessor record respectively at the end of the lease when the option is exercised?;(d) What journal entries would lessee and lessor record respectively at the end of the lease if the option is NOT exercised?

 

Paper#24586 | Written in 18-Jul-2015

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