The information below relates to a leasing arrangement betweenSummer Leasing Company and Talon Company, a lessee.
Inception date January 1, 2020
Lease term 6 years
Annual lease payment due at the beginning of
each year, beginning with January 1, 2020 $150,000
Fair value of asset at January 1, 2020 $760,000
Economic life of leased equipment 7 years
Residual value of equipment at end of lease term,
guaranteed by the lessee $65,500
Lessor’s implicit rate 10%
Lessee’s incremental borrowing rate 12%
January 1, 2020
The asset will revert to the lessor at the end of the lease term.The lessee has guaranteed the lessor a residual value of $65,500.The lessee uses the straight-line depreciation method for allequipment.
Instructions
(i) What is the lease liability for Talon Company?
(ii) Record the lease on Talon Company’s books at the date ofinception.
(iii)Record the first year’s depreciation on Talon Company’sbooks.
