Locatelli Partners LP agreed to lease a piece of heavy

#3261
Locatelli Partners (LP) agreed to lease a piece of heavy equipment to Sonata Company on
January 1. LP paid $ 195,100 to produce the machine and carried it at this amount in its
inventory. The fair value (current selling price) of the machine is $ 210,002. The lease terms are
listed below:• Annual rental payments of $ 46,466 are due at the beginning of each year. These
are the minimum rental payments and do not include any executory costs.• Lease term is seven
years.• There is a bargain purchase option expected to be exercised to acquire the asset at the
end of five years for $ 20,000.• The lessor expects to recover the guaranteed residual value of
$ 30,000 at the termination of the lease.• The economic life of the asset is eight years.• The
lessor’s 9% implicit rate is known to Sonata Company.• The lessee’s incremental borrowing
rate is 12%.• Annual maintenance is $ 8,000 and annual property tax is $ 9,500. The lessee
pays both at the end of the year.• LP has no material uncertainties regarding future costs to be
incurred under the lease and collectability is reasonably assured.• Sonata depreciates
(amortizes) similar machinery owned using the straight- line method. Requireda. Classify this
lease agreement for both the lessor and the lessee.b. Prepare an amortization table for the
lease.c. Prepare the journal entries for the lessor and the lessee during the first year of the
contract.View Solution:
Locatelli Partners LP agreed to lease a piece of heavy

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