On January 1 2016 Alice Company leases equipment for 5

#2612
On January 1, 2016, Alice Company leases equipment for 5 years, agreeing to pay $70,000
annually (including executory costs) at the beginning of each year under the noncancelable
lease. Superior Equipment Company, the lessor, agrees to remit all executory costs, estimated
to be $3,450 per year. The cost and also fair value of the equipment is $305,000. Its estimated
life is 10 years. The estimated residual value at the end of 5 years is $64,000 and is not
guaranteed by Alice; at the end of 10 years, it is $5,000. There is no bargain purchase option in
the lease or any agreement to transfer ownership at the end of the lease to the lessee. The
implicit interest rate is 12%. During 2016, Superior Equipment pays property taxes of $650,
maintenance costs of $1,600, and insurance of $1,200. There are no important uncertainties
surrounding the amount of unreimbursable costs yet to be incurred by the lessor. Straight-line
depreciation is considered the appropriate method by both companies.Required:1. Identify the
type of lease involved for Alice and Superior Equipment and give reasons for your
classifications.2. Prepare appropriate journal entries for 2016 for the lessee and lessor.3. If the
residual value at the end of 5 years is guaranteed by Alice, identify the type of lease and briefly
explain why. Prepare journal entries for 2016 and 2017 for the lessee and lessor. Also prepare
the journal entries for the lessee and the lessor when the lessee pays the guaranteed residual
value.View Solution:
On January 1 2016 Alice Company leases equipment for 5

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