Question

Assume that the following facts pertain to a non-cancelable lease agreement between Coco Inc. and Bubs, Corp, a Lessee.

Inception date

January 1, 2017

Residual value of equipment at end of lease term, unguaranteed

$50,000

Lease term

6 years

Economic life of leased equipment

8 years

Fair value of asset at January 1, 2017

$400,000

Lessor's implicit rate

12%

Lessee's incremental borrowing rate

10%

The lessee assumes responsibility for all executory costs, which are expected to amount to $2,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee uses the straight-line depreciation method for all equipment.

Create an amortization schedule that would be suitable for the lessee for the lease term.

Prepare journal entries for the lessee for 2017 and 2018 to record the lease agreement and all expenses related to the lease. Assume the Lessee's annual accounting period ends on December 31 and that reversing entries are used when appropriate.

Analyze the specific outcomes and write an analysis directed toward the team at Coco Inc. describing what the numbers mean and how they relate to the business.

Answer 1