Reference no: EM131780246
Assignment
Question 1 (Lessee Entries with Bargain-Purchase Option)
The following facts pertain to a noncancelable lease agreement between Snickerdoodle and Sugar Cookie, a lessee.
Inception date: May 1, 2012
Annual lease payment due at the beginning of each year,
Beginning with May 1, 2012 $18,829.49
Bargain-purchase option price at end of lease term $4,000
Lease term 5 years
Economic life of leased equipment 10 years
Lessor's cost $65,000
Fair Value of asset on May 1, 2012 $81,000
Lessor's implicit rate 10%
Lessee's incremental borrowing rate 10%
The collectability of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs.
(a) Discuss the nature of this lease for Sugar Cookie, the lessee.
(b) Discuss the nature of this lease for Snickerdoodle, the lessor.
(c) Prepare a lease amortization schedule for Sugar Cookie for the 5-year lease term.
(d) Prepare the journal entries on the lessee's books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2012 and 2013. Assume a December 31 year-end.