Question

On July 1st, 2014, the Yuan Yuan Guo Corporation, a manufacturer and distributor of DVD recorders, entered a lease with Zhiyin Huang Rental Inc. Yuan Yuan Guo agreed to lease 20 DVDs for a period of six years beginning July 1st, 2014. Other lease terms as follows:

Annual Lease Payments beginning 01/07/14 .............. $ 2,003

Manufacturing Cost of each DVD ................................ 300

Normal Selling Price of each DVD .............................. 525

Estimated economic (EUL) for the DVD’s ................... 9 years

Implicit rate in the lease (not known by Zhiyin Huang) Estimated Residual Value of each DVD at the end of the lease term 10.0 %

(not guaranteed by Zhiyin Huang) ............................... $ 80

Zhiyin Huang can borrow at 12.0 percent and agrees to assume full responsibility for all repairs and maintenance of the machines.

Zhiyin Huang will return the DVDs to Yuan Yuan Guo. Since Zhiyin Huang is a good credit risk,

Yuan Yuan Guo is certain to collect the lease payments and will not incur any additional costs after the date of the lease agreement. Both Companies follow ASPE Required:

1. Determine how Yuan Yuan Guo, the lessor, and Zhiyin Huang, the lessee, should classify the lease.

2. Prepare all required journal entries for the Lessee on July 1st, 2014.

3. Prepare the required journal entries for the Lessee on December 31st, 2014 (assuming a December 31st Fiscal Year End).

4. Prepare the required journal entries for the Lessee on July 1st, 2015

5. Prepare the required journal entries for the Lessee on December 31st, 2015 (assuming a December 31st Fiscal Year End).

6. Assume that when the DVD’s are returned to Yuan Yuan Guo at the end of the lease term, the residual value of each DVD is only $70. Prepare the journal entry to record the return of the machines by Zhiyin Huang.

Answer 1