Answered: what kind of lease is this wildhorse…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Answer all the subparts a,b,c,d .if Answered within 45mins, it would be helpful.

wildhorse company on january 21 2021 enters into a 9 year noncancelable lease for equipment having an estimated useful life of 10 years and a fair value to the leasor, daly corp., at the inception of the lease of $3,590,000. wildhorses incremental borrowing rate is 8%. wildhorse uses the straight line method to depreciate its assets. the lease contains the following provisions:

1. rental payments of $292,000 are payable at the beginning of each six month period.

2. an option allowing the leasor to extend the lease one year beyond the lease term

3. a guarantee by wildhorse that daly corp will realize $220,000 from selling the asset at the expiration of the lease. however the actual residual value is expected to be $116,000

Answer the following:

a) what kind of lease is this wildhorse company?

b) what should be considered the lease term?

c) what is the present value of the lease payments for (1) classification of the lease and (2) for measurement of the lease liability?

d) what journal entries would wildhorse record during the first year of the lease?

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