On January 1 of Year 1, Lessee Inc. leased equipment at an annual payment of $212,748, payable each January 1 for four years, with the first payment due immediately. The equipment had a fair value of $1,000,000 and a book value of $937,500, and was commonly purchased or leased by customers. The lessor estimates that the equipment has an estimated useful life of eight years and an estimated residual value of $312,500, not guaranteed by the lessee. Lessor's implicit rate is 7.5%, which is unknown to the lessee. The lessee's incremental borrowing rate is 8%. The lease does not contain a purchase option or a renewal option. The lessee had no other costs associated with this lease.
Required
a. How would Lessee Inc. classify the lease?
Lease Liability Schedule
Right-of-Use Asset Schedule
Journal Entries
b. Prepare a schedule of the lease liability for the 4-year lease term.
• Note: Round each amount in the schedule to the nearest whole dollar. Use the rounded amount for later calculations in the schedule.
Date Lease Payment Interest on Liability Lease Liability Change Lease Liability
Jan. 1, Year 1 $ 0 $ 0 $ 0
Jan. 1, Year 1 $ 0 $ 0 $ 0
Jan. 1, Year 2 $ 0 $ 0 $ 0
Jan. 1, Year 3 $ 0 $ 0 $ 0
Jan. 1, Year 4 $ 0 $ 0 $ 0
Total $ 0 $ 0 $ 0
c. Prepare a schedule of the right-of-use asset for the 4-year lease term.
• Note: Round each amount in the schedule to the nearest whole dollar. Use the rounded amount for later calculations in the schedule.
Date Lease Expense Interest on Liability Right-of-Use Asset Change Right-of-Use Asset
Jan. 1, Year 1 $ 0 $ 0 $ 0
Year 1 $ 0 $ 0 $ 0
Year 2 $ 0 $ 0 $ 0
Year 3 $ 0 $ 0 $ 0
Year 4 $ 0 $ 0 $ 0
Total $ 0 $ 0 $ 0
d. Prepare the entries for Lessee Inc. on January 1 and December 31 of the first two years of the lease term, assuming Lessee Inc.'s accounting year ends December 31.
• Note: Round your answers to the nearest whole dollar.
Date Account Name Dr. Cr.
Jan. 1, Year 1 To record lease liability and right-of-use asset 0 0
Jan. 1, Year 1 To record lease payment 0 0
Dec. 31, Year 1 To record lease expense 0 0
Jan. 1, Year 2 To record lease expense 0 0
To record lease payment 0 0
Dec. 31, Year 2 To record lease expense 0 0