E21-8B (Lessee Entries with Bargain Purchase Option) The following facts pertain to a noncancelable lease agreement between Earth Leasing Corporation and New Moon Company, a lessee.
            Inception date                                                                  October 1, 2014
Annual lease payment due at the beginning of
       each year, beginning with October 1, 2014                               $31,415.63
Bargain purchase option price at end of lease term                        $5,000.00
Lease term                                                                                                  6 years
Economic life of leased equipment                                                     12 years
Lessor’s cost                                                                                      $120,000.00
Fair value of asset at October 1, 2014                                            $160,000.00
Lessor’s implicit rate (not known by lessee)                                             8%
Lessee’s incremental borrowing rate                                                         6%
The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executory costs.
Instructions
(a) Discuss the nature of this lease to Earth Leasing.
(b) Discuss the nature of this lease to New Moon.
(c) Prepare a lease amortization schedule for New Moon for the 6-year lease term.
(d) Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and
to record the payments and expenses related to this lease for the years 2014 and 2015. New Moon’s
annual accounting period ends on December 31. New Moon uses reversing entries.