Textbook Problem

Determining Type of Lease and Subsequent Accounting 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 arc $35,000, payable at the beginning of each year.
• The interest rate implicit in the lease is 14%.
• 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 lessee is $150,000, and the fair value is approximately $185,100.
• 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 $35,000 discounted at 14% is $185,090.68 (the $1 purchase option is ignored as immaterial).

Required:

1. 1. Next Level Identify the classification of the lease transaction from Ballice’s point of view. Give the reasons for your classification.
2. 2. Prepare all the journal entries tor Ballieu for the years 2019 and 2020.
3. 3. Discuss the disclosure requirements for the lease transaction in Ballice’s notes to the financial statements.