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On January 1, 2017 T’Pol Co. leases a warp core to Tucker Inc.  The details are as...

On January 1, 2017 T’Pol Co. leases a warp core to Tucker Inc.  The details are as follows:

  • The lease term is 10 years with annual rental payments of $3,449 at the end of each year.
  • Ownership is not transferred, there is no purchase option, and the asset is not specialized in nature.  Collectability of payments is probable.
  • The core has a fair value of $34,000, a book value of $22,000, and a useful life of 15 years.
  • At the end of the lease term, T’Pol expects the core to be worth $12,000.  $8,000 of this value has been guaranteed by Quark Co., a third party.
  • Tucker’s incremental borrowing rate is 6% and it does not know the implicit rate in the lease.
  1. Classify this lease for both T’Pol and Tucker.

  1. Determine the implicit rate on the lease.  Prepare T’Pol’s amortization tables.

  1. Prepare the 2017 and 2018 journal entries for T’Pol.

  1. Prepare Tucker’s 2017 and 2018 journal entries.

  1. Suppose that Tucker guaranteed the residual value instead of Quark.  Would this change the classification of the lease for Tucker or T’Pol?  Compare the net income T’Pol would recognize from the lease in the first year under both scenarios.  Which is higher and why?

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ekkarill92 answered 2 years ago
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