Question

(b) The information below relates to a leasing arrangement between Summer 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 all equipment.
Instructions

(iv) Record interest expense and lease liability for Talon Company for the year ending December 31, 2020.
(v) Discuss the nature of this lease to Summer Leasing Company.

Note:please show working in Detail

Answer 1

iv)
Date	Account Titles and explanation	Debit	Credit
	Interest expenses($718,618.02 -150,000) x 10%	$56,861.80
	Interest Payable		$56,861.80
Present value of annual lease payment = $150,000 x PVAD(10%,6)	$718,618.02
V)
This lease is a capital lease to the lessee because the lease term (six years) exceeds 75% of the remaining economic life of the asset (seven years). Also, the present value of the minimum lease payments exceeds 90% of the fair value of the asset