Question

ANTM Lease and BHP Ltd. sign a lease agreement dated 1 January 2019, that calls for ANTM
to lease a backhoe to BHP beginning January 1, 2019. The agreement asks ANTM Lease give
the right use of a backhoe to BHP for the periods of 1 January 2019 to 1 January 2024.
The terms and provisions of the lease agreement and other pertinent data are as follows:
1. The term of the lease is five years. The lease agreement is non-cancelable, requiring
equal rental payments of $17,500 at the end of each year/31 December (annuity-due
basis).
2. The backhoe has a fair value at the commencement of the lease of ????, an estimated
economic life of five years, and a guaranteed residual value of $4,000. (BHP expects
that it is probable that the expected value of the residual value at the end of the
lease will be greater than the guaranteed amount of $4,000.)
3. The lease contains no renewal options. The backhoe reverts to ANTM Lease at the
termination of the lease.
4. BHP incremental borrowing rate is 4 percent per year.
5. BHP depreciates its equipment on a straight-line basis.
6. ANTM sets the annual rental rate to earn a rate of return of 5 percent per year; BHP is
aware of this rate.
Instructions:
a. Determine who is the lessee and lessor.
b. Determining the value of right-of-use asset and lease liability for lessee.
c. Journals on the date of beginning of the agreement for lessee.
d. Prepare the table of payments and interest expense for lessee.
e. Prepare the journal to recognize interest expense, depreciation expense at the end of
years, and payments made during the lease agreement.
f. Compute the fair value of the backhoe for the lessor at the beginning of the contract;
and prepare the table and journal needed by the lessor during the lease agreement.
g. If the fair value of the backhoe is $1,000 at the end of the lease agreement, prepare the
journal entry on 1 January 2024 for lessee and lessor.

Answer 1