LEASES PROBLEM L Lessor Company and Lessee Company agreed to a lease. The lessor’s cost of the leased asset is $38,000 and its current fair value is $40,000. While the lease term is 4 years, the estimated useful life of the asset is six years (zero residual at that time). The lease begins on January 1, 2020, and there is an estimated unguaranteed residual value of the leased asset at the end of the lease term (4 years) of $4,000. There is a purchase option in this lease, whereby the lessee can buy the asset at the end of the lease term for $4,500. The asset reverts to the lessor unless the lessee purchases it at the end of the lease. Four annual lease rentals due on January 1 of each year: $11,643. Required: 1. What was the lessor's implicit interest rate in this lease?
LEASES PROBLEM L
Lessor Company and Lessee Company agreed to a lease. The lessor’s cost of the leased asset is $38,000 and its current fair value is $40,000. While the lease term is 4 years, the estimated useful life of the asset is six years (zero residual at that time). The lease begins on January 1, 2020, and there is an estimated unguaranteed residual value of the leased asset at the end of the lease term (4 years) of $4,000. There is a purchase option in this lease, whereby the lessee can buy the asset at the end of the lease term for $4,500. The asset reverts to the lessor unless the lessee purchases it at the end of the lease. Four annual lease rentals due on January 1 of each year: $11,643.
Required:
1. What was the lessor's implicit interest rate in this lease?
2. What type of lease was this to the lessee? To the lessor? Explain.
3. What entries would the lessor and lessee make in year 2020?
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