Luv Company enters into a non-cancelable lease agreement with Soap Company. The details of the agreement are as follows:
Jan 1, 2011
Annual lease payment at beginning of each year, starting Jan 1, 2011
Bargain-purchase option at the end of the lease
Economic life of leased equipment
Fair value of asset
Lessorâ€s implicit rate
Lesseeâ€s implicit rate
Present value of annuity due i=10%, n=5 periods
Present value i=10%, n=5 years
Soap company will receive the lease payments. The collectability of the lease payments is reasonably predictable and there are no uncertainties surrounding the costs to be incurred by Soap companyâ€”the lessor.
- For Luv companyâ€”the lesseeâ€”what is the nature of the lease? What tests does it meet?
- For Soap companyâ€”the lessorâ€”what is the nature of the lease?
- Prepare the amortization schedule for Luv Company for the 5-year term.
- Prepare the journal entries on the books of Luv companyâ€”the lesseeâ€”for recording the lease and the recording of lease payment and expenses for 2011.
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