The following facts pertain to a lease agreement between Royal Leasing company and Mariner Inc., a lessee:
1. Inception of lease .............................................. May 1, 2015
2. Lease term (fixed and noncancelable) ................... 5 years
3. Estimated economic life of the equipment .............. 10 years
4. Fair market value at lease inception ....................... $22,500
5. Lessor's cost of asset ........................................... $22,500
6. Bargain purchase offer .......................................... None
7. Transfer of title ..................................................... No
8. Guaranteed residual value by lessee
May 1, 2015 ............................................................ $1,000
9. Lessee's normal depreciation method........................ Straight Line
10. Lessee's incremental borrowing rate .....................,. 10%
11. Executory costs .................................................... None
12. Initial indirect costs ............................................... None
13. Collectability of rental payment ............................... Assured
14. Performance by lessor ............................................ Complete
15. Annual rental (1st payment, May 1, 2015) ................... $5,433
16. Lessor's implicit interest rate ................................... None
Required:
1. Determine what type of lease this is for the lessee.
2. Determine what type of lease this is for the lessor.
3. Provide entries for the lessee and the lessor from May 1, 2015, through May 1, 2016. Assume interest has been accrued on December 31.
4. Provide entries for the lessee and the lessor if the asset is disposed of for $10,000 by the lessor on May 1, 2020.