On January 1, 2017, the Kane Kite Company leased a newfabric-cutting machine from Stewart Standard, Inc. Under the termsof the lease, Kane Kite must pay $ 200,000 at the beginning of eachyear, beginning on January 1, 2017, over a nine- year term. Thelease terms do not contain a transfer of ownership and there is nobargain purchase option. There is also no residual value specifiedin the contract. The cutting machine has a useful life of nineyears and Kane Kite depreciates similar equipment owned using thestraight- line method. Kane Kite’s incremental borrowing rate is 9%and the 8% implicit rate in the lease is known to Kane Kite. Themachine cost Stewart Standard $ 1,300,000 to manufacture and it hasa selling price of $ 1,349,328. Stewart has no uncertainties as tofuture costs to be incurred and collection of the annual leasepayment. Kane is required to pay $ 5,600 at the end of each yearfor maintenance and taxes, which it records as general andadministrative expenses.
Required a. What type of lease is this for both the lessee andlessor? b. Prepare the lease amortization table for the lease term.c. Prepare the journal entries necessary for Stewart Standard onJanuary 1, 2017, and on December 31, 2017. d. Prepare the journalentries necessary for Kane Kite Company on January 1, 2017, and onDecember 31, 2017.
