Question

Jennifer leasing company signs an agreement on january 1, 2025, to lease equipment to shamrock company. the following information relates to this agreement.

1. the term of the non-cancelable lease is 3 years with no renewal option. the equipment has an estimated economic life of 5 years.
2. the fair value of the asset at january 1, 2025, is $75,000.
3. the asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $7,000, none of which is guaranteed.
4. the agreement requires equal annual rental payments of $23,830.51 to the lessor, beginning on january 1, 2025.
5. the lessee's incremental borrowing rate is 5%. the lessor's implicit rate is 4% and is unknown to the lessee.
6. Shamrock uses the straight-line depreciation method for all equipment.

Answer 1

The question pertains to a lease agreement for accounting purposes, involving the recognition of a right-of-use asset and lease liability, calculation of present value of lease payments, and the recording of annual lease expenses.

Step-by-step explanation:

The subject question is regarding a lease agreement between Jennifer Leasing Company and Shamrock Company. It details the terms of the lease, including the duration, payments, value of the leased equipment, depreciation method, and interest rates.

To account for this lease, Shamrock Company would typically recognize a right-of-use asset and lease liability on their balance sheet at the present value of the lease payments, using their incremental borrowing rate since the lessor's rate is not known.

The annual lease payment is given as $23,830.51, and payments are made at the beginning of each year. Using Shamrock's incremental borrowing rate of 5%, the present value of these payments is calculated.

Over the lease term, Shamrock would recognize both interest expense on the lease liability and depreciation expense on the right-of-use asset, adhering to the straight-line depreciation method.