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Question - On January 1, 2018, Avalanche Company entered into an agreement to lease equipment for a ten-year period. The lease requires Avalanche to pay $220,000 on January first of each year, with the first payment required at the lease inception. Included within the $220,000 annual payment are executory costs totaling $15,000. Avalanche has the option to purchase the equipment at the end of the lease term for $55,000; the fair value of the equipment at the end of the lease term is estimated to be $120,000. The equipment's useful life is estimated to be 12 years and the salvage value after 12 years is estimated to be $10,000. Avalanche's incremental borrowing rate is 8% and the implicit rate known by Avalanche is 7%. Avalanche accounts for leases under ASC 840.
Required -
1. Determine the lease liability immediately after the January 1, 2019 payment was made.
2. Determine the book value of the leased asset as of December 31, 2019.
3. Determine the total expenses to be reported on the income statement for the year ended December 31, 2019.
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