The following facts pertain to a non cancelable lease agreement between Lennox Leasing Company and Gill Company, a lessee. (Round all numbers to the nearest cent.)
Inception date: May 1, 2012
Annual lease payment due at the beginning of each year, beginning with May 1,
2012: $18,829.49
Bargain purchase option price at end of lease term: $4,000.00
Lease term: 5 years
Economic life of leased equipment: 10 years
Lessor’s cost: $65,000.00; fair value of asset at May 1, 2012, $81,000.00
Lessor’s implicit rate: 10%; lessee’s incremental borrowing rate 10%
The lessee assumes responsibility for all executory costs.
Instructions
(a) Discuss the nature of this lease to Gill Company.
(b) Discuss the nature of this lease to Lennox Company.
(c) Prepare a lease amortization schedule for Gill Company for the 5 year lease term.
(d) Prepare the journal entries on the lessee’s books to refl ect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2012 and 2013. Gill’s annual accounting period ends on December 31. Reversing entries are used by Gill.