15 Feb Airbnb the lessee and Arthur the lessor entered into a lease agreement on January 1, 2019, for equipment. The following data are relevant to the lease agreement: 1. The term of
Problem V: Airbnb the lessee and Arthur the lessor entered into a lease agreement on January 1, 2019, for equipment.
The following data are relevant to the lease agreement:
1. The term of the non-cancelable lease is 5 years. Payments of $15,000 including executory costs of $5,000 are due at the end each year.
2. The equipment has an economic life of 11 years with a residual value of $16,000 at the end of the lease, but not guaranteed. The equipment has a carrying amount of $44,000 and fair value $50,000.
3. The lessee and lessor depreciate similar machinery it owns on the straight-line basis.
4. Lessee’s incremental borrowing rate is 12% per year. Lessee is aware that the lessor used an implicit rate of 10% in computing the lease payments.
The collectability of the lease payments is probable for the lessor.
INSTRUCTIONS
(a) Indicate the type of lease to lessee and lessor.
(b) Prepare the journal entries on the books of lessee and lessor through December 31, 2023.
(c) What if the residual value is guaranteed?
(d) Briefly explain the difference in accounting if there is a bargain purchase option of $16,000 instead of a guaranteed residual value at the end of the lease.
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