# Ayayai Corporation entered into a lease agreement on January 1, 2020, to provide Blossom Company with...

###### Question:

Ayayai Corporation entered into a lease agreement on January 1, 2020, to provide Blossom Company with a piece of machinery. The terms of the lease agreement were as follows.

 1 The lease is to be for 3 years with rental payments of $13,936 to be made at the beginning of each year. 2 The machinery has a fair value of$58,000, a book value of $40,000, and an economic life of 8 years. 3 At the end of the lease term, both parties expect the machinery to have a residual value of$20,000, none of which is guaranteed. 4 The lease does not transfer ownership at the end of the lease term, does not have a bargain purchase option, and the asset is not of a specialized nature. 5 The implicit rate is 4%, which is known by Dawkins. 6 Collectibility of the payments is probable.

Evaluate the criteria for classification of the lease, and describe the nature of the lease.

For the lessee, it is a                                                                       operating leasesales-type leasefinance lease, and for the lessor, it is a                                                                       finance leasesales-type leaseoperating lease.

Prepare the amortization schedules Blossom will use over the lease term.

 BLOSSOM COMPANY Lease Amortization Schedule Annuity-Due Basis Date Annual Payment Interest on Liability Reduction of Lease Liability Lease Liability 1/1/20 $1/1/20$  1/1/21 1/1/22
 Lease Expense Schedule Date (A) Straight-Line Expense (B) Interest on Lease Liability (C) Amortization of Right-of-Use Asset (and Liability) (A-B) Carrying Value of Right-of-Use Asset 1/1/20 $12/31/20$  12/31/21 12/31/22

Prepare the 2020 journal entries for Blossom.

 Date Account Titles and Explanation Debit Credit Jan. 1 (To record lease) Jan. 1 (To record first lease payment) Dec. 31 (To record lease expense and amortization)

Prepare the 2020 journal entries for Ayayai.

 Date Account Titles and Explanation Debit Credit Jan. 1 (To record lease payments) Dec. 31 (To record lease revenue) Dec. 31 (To record depreciation)

Suppose the lease were only for one year instead of 3 years, with just one lease payment at the beginning of the lease term. Prepare any journal entries Blossom would need, assuming it elects to use the short-term lease option.

 Date Account Titles and Explanation Debit Credit Jan. 1

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