Reference no: EM132572366
Widget Corporation ("Widget") manufactures equipment with an estimated economic life of 11 years. On May 30, 2020, Widget leases it to Gadget Corporation ("Gadget") for a period of 10 years. Details of the lease are as follows:
Equipment has a fair value and cost at the inception of the lease: $185,078.
Guaranteed residual value: $20,000.
Annual lease payment, due at beginning of each year: $25,250.
Lease contains no renewal options and the equipment reverts to Widget at the end of the lease.
Gadget's incremental interest rate, as well as implicit rate is 9%.
Gadget uses straight-line amortization for similar equipment that it owns.
Widget has determined that collectibility of lease payments is reasonably predictable and that no additional costs will be incurred.
Required:
Question 1. Identify the lease criteria.
Question 2. How the lessee and lessor should account for the lease transaction. Assume both companies follow ASPE
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