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On January 1, 2018, Moorecraft Finance Company agreed to lease a piece of machinery to War...

On January 1, 2018, Moorecraft Finance Company agreed to lease a piece of machinery to War Constructions Products, Inc. Moorecraft paid $1,493, 183 to acquire the machine from the manufacturerer and carries it at this amount in its financial statements. The fair value (current selling price) of the machine is $1,493,183. The relevant lease terms follow.

- Annual rental payments of $263,516 are due on December 31 of each year. THese payments do not include any other lease components such as insurance or property taxes.

- The lease term is 6 years.

- There is no pruchase option

- The lessor expects to recover the guaranteed residual value of $280,000 at the termination of the lease.

- The economic life of the asset is 7 years.

- The lessor's implicit rate is known to Ward Construction.

- The lessor has no material uncertainties regarding future costs to be incurred under the lease, and collectibility of lease payments is reasonably assured.

- Ward depreciates similar machinery that it owns using the straight line method. The fiscal year ends on December 31 for both companies.

REQUIRED:

a) Determine the lessor's implicit rate of return from the lease.

b) Determine the lease classification for the lessee. Support your answer with clear explanation.

c) Prepare the amortization table of the lessee for the first three years of the lease term (Date, Interest, Carrying amount of)

d) Prepare the lessee's journal entries required for the asset and lease liability for the first 2 years of thelease term ( Date, Account titles and descriptions, Debit, Credit)

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Expert Solution

ekkarill92 answered 1 year ago
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