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On january 1, 2011, Kelly Company leased a boat from Grant Company. The lease is noncancelable and requires five equal annual payments of $55,483 each. The lease payments are due each Dec. 1, beginning Dec. 1, 2011. The boat is recorded on Grant’s books at $185,000, but its fair value is $210,000. Grant expects that the boat’s residual value at the end of the lease term will be $10,000, but it is not guaranteed by Kelly. However, Kelly has an option to purchase the boat for $10,000 at the end of the lease term.
At the inception of the lease, the boat has a remaining economic life of six years with a $2,500 estimated salvage value at the end of its life. Both firms use the straight-line method of depreciation and have December 31 year-ends for financial reporting purposes. The interest rate used by Grant Company to calculate the annual lease payment is 12%, and known by Kelly.( the PV of an ordinary annuity of $1 for 5 periods at 12% is 3.6047).
a)Discuss the nature of the lease for both the lessee (Kelly) and the lessor (Grant)
b)Prepare a lease amortization schedule
c)Prepare the required journal entries for the year 2011
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