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    Leases Problem

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    On August 1, 1993, Creative Works (lessee) and Netsis Computer Industries (lessor) signed a lease with the following terms:

    1. Term: 5 years
    2. Annual payments of $39,000
    3. Implicit interest rate (not known to lessee) 10%
    4. Lessor retains ownership of asset at end of lease
    5. Fair value of asset $168,834
    6. Cost of asset $130,000 (not known to lessee)
    7. Incremental borrowing rate: 12%
    8. First payment due 8/1/93
    9. Estimated useful life of asset: 7 years
    10. No collection or cost uncertainties for lessor
    11. Est. fair value of asset at end of lease: $10,000
    12. The residual value is NOT guaranteed by lessee
    13. A commission of 1% of the sales price (PVMLP) is paid to the salesperson who negotiated the lease.
    14. Lessor and lessee both use straight-line depreciation method for fixed assets.

    Answer the following questions:

    a. Classify this lease from the perspective of the lessee. Explain.
    b. Prepare all necessary journal entries for Creative Works at 8/1/93 and 12/31/93 (end of fiscal year).
    c. Classify this lease from the perspective of the lessor. Explain.
    d. Prepare all necessary journal entries for Netsis Computer Industries (CCI) at 8/1/93 and 12/31/93 (end of fiscal year).

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    https://brainmass.com/business/financial-accounting-bookkeeping/leases-annual-payments-582401

    Solution Preview

    There is no Title Transfer and no BPO (business process outsourcing). The lease term is 71% of the economic ...

    Solution Summary

    The annual payments for leases are examined.

    $2.19