Assume that the following facts pertain to a non-cancelablelease agreement between Coco Inc. and Bubs Corp, a Lessee.
Inception date January 1, 2018
Residual value of equipment at end of lease term, unguaranteed$100,000
Lease term 6 years
Economic life of leased equipment 8 years
Fair value of asset at January 1, 2017 $800,000
Lessor’s implicit rate 12%
Lessee’s incremental borrowing rate 10%
The lessee assumes responsibility for all executory costs, whichare expected to amount to $4,000 per year. The asset will revert tothe lessor at the end of the lease term. The lessee uses thestraight-line depreciation method for all equipment.
1.Using the spreadsheet Lease Amortization Schedule, prepare anamortization schedule that would be suitable for the lessee for thelease term.
2.Using the spreadsheet Journal Entries, prepare the journalentries for the lessee for 2018 and 2019 to record the leaseagreement and all expenses related to the lease. Assume theLessee’s annual accounting period ends on December 31 and thatreversing entries are used when appropriate.
3.Prepare journal entries for the lessor of the transaction.
