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 $30,400, payable at the beginning of each year.•The interest rate implicit in the lease is 12%.•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 $145,500, and the fair value is approximately $169,100.•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 $30,400 discounted at 12% is $169,138.21 (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.2.Prepare all the journal entries for Ballieu for the years 2019 and 2020.

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Asked Nov 25, 2019
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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 $30,400, payable at the beginning of each year.
The interest rate implicit in the lease is 12%.
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 $145,500, and the fair value is approximately $169,100.
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 $30,400 discounted at 12% is $169,138.21 (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.
2. Prepare all the journal entries for Ballieu for the years 2019 and 2020.
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Expert Answer

Step 1
  1. It will be classified as sale type finance lease transaction:

 

a.   The Lease term is for major part of the economic life of the underlying asset, even if tittle is not transferred and in given case lease term is 8 years and economic life of assets is also 8 year.

b.    The net investment value is differ from carrying value.

Step 2

Following is the Lease Amo...

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B's Company Lease Amortization Schedule Interest Lease Unearned Interest Date Annual Net Lease Revenue at Receivable Investment Раyment Received 12% on Net Lease Investment 1/1/2019 $74,061.79 $74,061.79 $57,413.21 $42,414.8 $29,264.58 $18,184.33 $9,422.45 $3,257.14 $169,138.21 $138,738.21 $124,986.79 $109,585.2 $92,335.42 $73,015.67 $51,377.55 $27,142.86 $0 $243,200 $212,800 $182,400 $152,000 $121,600 $91,200 $60,800 $30400 $0 $30,400 $30,400 $30,400 $30,400 $30,400 $30,400 $30,400 $30,400 1/1/2019 31/12/2019 $16,648.58 $14,998.41 $13,150.22 $11,080.25 $8,761.88 $6,165.31 $3,257.14 31/12/2020 31/12/2021 31/12/2022 31/12/2023 31/12/2024 31/12/2025 $0

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