Assume that thefollowing facts pertain to a non-cancelable lease agreement betweenCoco Inc. and Bubs, Corp, a Lessee.
Inception date
January 1, 2017
Residual value ofequipment at end of lease term, unguaranteed
$50,000
Lease term
6 years
Economic life ofleased equipment
8 years
Fair value of asset atJanuary 1, 2017
$400,000
Lessor's implicitrate
12%
Lessee's incrementalborrowing rate
10%
The lessee assumesresponsibility for all executory costs, which are expected toamount to $2,000 per year. The asset will revert to the lessor atthe end of the lease term. The lessee uses the straight-linedepreciation method for all equipment.
Create an amortization schedule that would be suitable for thelessee for the lease term.
Prepare journal entries for the lessee for 2017 and 2018 torecord the lease agreement and all expenses related to the lease.Assume the Lessee's annual accounting period ends on December 31and that reversing entries are used when appropriate.
Analyze the specific outcomes and write an analysis directedtoward the team at Coco Inc. describing what the numbers mean andhow they relate to the business.
