Tzar Corporation entered into a lease agreement on January 1, 2010, to provide Playtpus Company with a piece of machinery. The terms of the lease agreement were as follows.
· The lease is to be for 3 years with rental payments of $10,521 to be made at the beginning of each year
· The machinery has a fair value of $55,000, a book value of $40,000, and an economic life of 8 years.
· At the end of the lease term, both parties expect the machinery to have a residual value of $30,000, none of which is guaranteed.
· The lease does not transfer ownership at the end of the lease term, does not have a bargain purchase option, and the asset is not of a specialized nature.
· The implicit rate is 6%, which is known by Playtpus.
· Collectibility of the payments is probable.
Required:
1. Please show the calculation(s)/discussion of the test you use to answer the following questions
a. What type of lease is this for the lessee?
b. What type of lease is this for the lessor?
Tzar Corporation entered into a lease agreement on January 1, 2010, to provide Playtpus Company with a piece of machinery. The terms of the lease agreement were as follows.
· The lease is to be for 3 years with rental payments of $10,521 to be made at the beginning of each year
· The machinery has a fair value of $55,000, a book value of $40,000, and an economic life of 8 years.
· At the end of the lease term, both parties expect the machinery to have a residual value of $30,000, none of which is guaranteed.
· The lease does not transfer ownership at the end of the lease term, does not have a bargain purchase option, and the asset is not of a specialized nature.
· The implicit rate is 6%, which is known by Playtpus.
· Collectibility of the payments is probable.
Required:
1. Please show the calculation(s)/discussion of the test you use to answer the following questions
a. What type of lease is this for the lessee?
b. What type of lease is this for the lessor?
Related questions
Pharoah Company leases a building to Walsh, Inc. on January 1, 2017. The following facts pertain to the lease agreement.
| 1. | The lease term is 5 years, with equal annual rental payments of $3,587 at the beginning of each year. | |
| 2. | Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. | |
| 3. | The building has a fair value of $16,800, a book value to Pharoah of $9,800, and a useful life of 6 years. | |
| 4. | At the end of the lease term, Pharoah and Walsh expect there to be an unguaranteed residual value of $2,450. | |
| 5. | Pharoah wants to earn a return of 9% on the lease, and collectibility of the payments is probable. This rate is known by Walsh. |
Using the original facts of the lease, show the journal entries to be made by both Pharoah and Walsh in 2017.
