Luv Company enters into a non-cancelable lease agreement with Soap Company. The details of the agreement are as follows:
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Inception date
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Jan 1, 2011
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Annual lease payment at beginning of each year, starting Jan 1, 2011
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$18,000
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Bargain-purchase option at the end of the lease
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$4,000
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Lease term
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5 years
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Economic life of leased equipment
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5 years
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Lessor's cost
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$60,000
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Fair value of asset
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$70,000
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Lessor's implicit rate
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10%
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Lessee's implicit rate
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10%
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Present value of annuity due i=10%, n=5 periods
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4.16987
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Present value i=10%, n=5 years
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0.621
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Soap company will receive the lease payments. The collectability of the lease payments is reasonably predictable and there are no uncertainties surrounding the costs to be incurred by Soap company-the lessor.
- For Luv company-the lessee-what is the nature of the lease? What tests does it meet?
- For Soap company-the lessor-what is the nature of the lease?
- Prepare the amortization schedule for Luv Company for the 5-year term.
- Prepare the journal entries on the books of Luv company-the lessee-for recording the lease and the recording of lease payment and expenses for 2011.