On January 1, 2019, Ballieu Company leases specialty equipment with an economic life of 8 years to Anderson Company. The lease contains the following terms and provisions:•The lease is noncancelable and has a term of 8 years.•The annual rentals are $40,500, payable at the beginning of each year.•The interest rate implicit in the lease is 13%.•Anderson agrees to pay all executory costs directly to a third party and is given an option to buy the equipment for $1 at the end of the lease term, December 31, 2026.•The cost of the equipment to the lessor is $155,500, and the fair value is approximately $219,600.•Ballieu incurs no material initial direct costs.•It is probable that Ballieu will collect the lease payments.•Ballieu estimates that the fair value is expected to be significantly greater than $1 at the end of the lease term. Ballieu calculates that the present value on January 1, 2019, of 8 annual payments in advance of $40,500 discounted at 13% is $219,615.71 (the $1 purchase option is ignored as immaterial).Required:1.Next Level Identify the classification of the lease transaction from Ballieu’s point of view. Give the reasons for your classification.2.Prepare all the journal entries for Ballieu for the years 2019 and 2020.

Answered: On January 1, 2019, Ballieu Company…

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter20: Accounting For Leases

Section: Chapter Questions

Problem 1P: Determining Type of Lease and Subsequent Accounting On January 1, 2019, Ballieu Company leases...

See similar textbooks

Related questions

Concept explainers

Question

On January 1, 2019, Ballieu Company leases specialty equipment with an economic life of 8 years to Anderson Company. The lease contains the following terms and provisions:

•	The lease is noncancelable and has a term of 8 years.
•	The annual rentals are $40,500, payable at the beginning of each year.
•	The interest rate implicit in the lease is 13%.
•	Anderson agrees to pay all executory costs directly to a third party and is given an option to buy the equipment for $1 at the end of the lease term, December 31, 2026.
•	The cost of the equipment to the lessor is $155,500, and the fair value is approximately $219,600.
•	Ballieu incurs no material initial direct costs.
•	It is probable that Ballieu will collect the lease payments.
•	Ballieu estimates that the fair value is expected to be significantly greater than $1 at the end of the lease term.

Ballieu calculates that the present value on January 1, 2019, of 8 annual payments in advance of $40,500 discounted at 13% is $219,615.71 (the $1 purchase option is ignored as immaterial).

Required:

1.	Next Level Identify the classification of the lease transaction from Ballieu’s point of view. Give the reasons for your classification.
2.	Prepare all the journal entries for Ballieu for the years 2019 and 2020.

Expert Solution

Step 1 Introduction

The question is based on the concept of Lease Accounting in Financial Accounting.

Trending now

This is a popular solution!

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.