On January 1 year 1, superstar company leased a building to pzed Inc. The lease arrangement is...

On January 1 year 1, superstar company leased a building to pzed Inc. The lease arrangement is for 20 years. The building is expected to have no residual value at the end of the lease. The leased building has a cost of $21,000,000 and was purchased for cash on January 1, year 1. The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value. Lease payments are $1,778,000 per year and are made at the beginning of the year. Superstar has an incremental borrowing rate of 8%, and the rate implicit in the lease is unknown to Pzed. Both the lessor and the lessee are on a calendar-year basis.

1) Prepare the journal entries that superstar company should make in 2 year 1

2) Prepare the journal entries that PZED should make in Year 1.

Expert Solution

The above lease is operating lease for both lessor and lessee. Reasons-
(a) The lease doesnot have a purchase option for the lessee at the end of the lease term.
(b) The asset doesnot reverts back to the lessor after the lease term.
(c) The lease term doesnot cover substantial economic life of the asset, i.e., only 20 out of 50 years.
(d) The present value of minimum lease payments is not equal to the cost of the asset. (1778000*10.6036=18853199)

Hence, the above lease is Operating Lease.

ekkarill92 answered 2 years ago

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