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Sarh Pieces Inc. creates aluminum alloy parts for commercial aircraft. In a recent transaction Sarh leased...

Sarh Pieces Inc. creates aluminum alloy parts for commercial aircraft. In a recent transaction Sarh leased a high precision lathe machine from jack Revolving Corp. on January 1, 2019. The following information pertains to the leased asset and the lease agreement:

Cost of lathe to lessor

$140,000

Pranav's normal selling price for lathe

$178,268

Useful life

7 years

Estimated value at end of useful life

$8,000

Lease provisions

    Lease term

5 years

    Payment frequency

Annual

    Start date of lease

January 1

    Payment timing

December 31

    Estimated residual value at end of lease (unguaranteed)

$20,000

Interest rate implicit in the lease (readily determinable by lessee)

7%

The lathe machine will revert back to the lessor at end of lease term, title does not transfer to lessee at any time, and there is not a bargain purchase option.

Required:

a. Determine the amount of lease payment that the lessor would require to lease the asset to an outside party.( Same criteria as Lessee)

b. Classify this lease from the perspective of the lessor, Pranav Revolving Corp.

c. Prepare an amortization schedule for the lessor.

d. Prepare the journal entries on January 1, 2019 and December 31, 2019 for the lessor.

Solutions

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