ACCT303 American Commercial College of Texas Lease Calculations

On January 1, 2020, Tiffany Company leased new equipment to Masy’s
Corporation. The equipment cost Tiffany $180,000. The lease agreement
specified that Masy’s is to make five annual lease payments (on January 1,
beginning January 1, 2020) to yield Tiffany a 5% return. The equipment has
a five-year useful life with an unguaranteed residual value of $9,000. In
December 2019, Tiffany paid Masy’s $1,000 as an incentive to sign the
lease and Masy’s paid legal fees of $500 related to the execution of the
lease. Ownership of the lease asset remains with Tiffany at the end of the
lease term. Masy’s is aware of the implicit interest rate used by Tiffany. The
accounting period for Masy’s ends December 31.
Required:
a. Compute the annual fixed lease payment.
b. What type of lease is this to the lessee? Explain.
c. Provide all journal entries associated with this lease for the lessee for the
years ended December 31, 2020, and 2021.

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