Discuss the nature of lease


Wolf Company manufactures a computer with an estimated economic life of 12 years and leases it to Fly Airlines for a period of 10 years. The normal selling price of the equipment is $210,482, and its unguaranteed residual value at the end of the lease term is estimated to be $20,000. Fly will pay annual payments of $30,000 at the beginning of each year and all maintenance, insurance, and taxes. Wolf incurred costs of $135,000 in manufacturing the equipment and $4,000 in negotiating and closing the lease. Wolf has determined that the collectibility of the lease payments is reasonably predictable, that no additional costs will be incurred, and that the implicit interest rate is 10%.

Required:

(Round all numbers to the nearest dollar.)

(a) Discuss the nature of this lease in relation to the lessor and compute the amount of each of the following items.

(1) Lease receivable.
(2) Sales price.
(3) Cost of sales.

(b) Prepare a 10-year lease amortization schedule.

(c) Prepare all of the lessor's journal entries for the first year.

(d) Assume Fly Airlines Co. has an incremental borrowing rate of 10%.

(1) Discuss the nature of this lease in relation to the lessee, and compute the amount of the initial obligation under capital leases.
(2) Prepare a 10-year lease amortization schedule.
(3) Prepare all of the lessee's journal entries for the first year.

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Accounting Basics: Discuss the nature of lease
Reference No:- TGS079433

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