Question

On January 1, 2019, Concord Corp. signs a contract to lease nonspecialized manufacturing equipment from Stone Inc. Concord agrees to make lease payments of $47,500 per year. Additional information pertaining to the lease is as follows:

1. The term of the noncancelable lease is 3 years. Payments are due every January 1, beginning January 1, 2019.

2. The fair value of the manufacturing equipment on January 1, 2019, is $155,000. The equipment has an economic life of 7 years.

3. Concord guarantees that the equipment will have a residual value of $15,000 at the end of the lease term. Concord believes that it is probable that it will be obligated under the guarantee.

4. Concord Corp. depreciates similar assets using the straight-line method.

5. Concord’s incremental borrowing rate is 12% per year; Stone’s implicit interest rate is11% and known by Concord.

6. Concord pays $2,500 per year for maintenance of the equipment directly to the applicable third party.

Required:

1. Examine and evaluate the lease classification criteria and determine what type of lease

   this is for Concord.

2. Prepare an amortization table summarizing the annual lease payments and the annual

   interest expense for each years of the entire lease term.

3. Prepare journal entries for Concord for the entire lease term. Assume that the equipment

   has a fair value of $4,500 at the end of the 3-year lease term.

Answer 1