On January 1, 2021, ACME Incorporated, a publicly traded company, signed a 5-year, non-cancellable lease...
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Accounting
On January 1, 2021, ACME Incorporated, a publicly traded company, signed a 5-year, non-cancellable lease agreement to lease equipment from Lessor Ltd. The details of the agreement are as follows:
1.
Yearly rental payments due January 01 each year of $150,000.
2.
Initial lease term: 5 years.
3.
Estimated economic life of leased equipment: 10 years.
4.
Equipment fair value at January 01, 2021: $661,000.
6.
The equipment has a residual value of $15,000 at the end of the lease,
which is not guaranteed by ACME.
7.
At the end of the lease the equipment will be returned to the lessor.
Additional information:
ACME's incremental borrowing rate is 10%.
The rate implicit in the lease is 11% and it is not known to ACME.
The interest rate implicit in the lease is not known to ACME.
Required (round calculation to four decimal places and final answers to the nearest dollar):
How will the lease be classified by the lessor assuming that the company follows ASPE. Support your answer.
Assuming the lease is classified as a direct financing lease by the lessor prepare the journal entries for 2022.
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