On January 1 2016 Ballieu Company leases specialty

equipment with #2611

On January 1, 2016, Ballieu Company leases specialty equipment with an economic life of 8
years to Anderson Company. The lease contains the following terms and provisions:• The lease
is noncancelable and has a term of 8 years.• The annual rentals are $35,000, payable at the
beginning of each year.• The interest rate implicit in the lease is 14%.• Anderson agrees to pay
all executory costs and is given an option to buy the equipment for $1 at the end of the lease
term, December 31, 2024.• The cost of the equipment to the lessor is $150,000, and the fair
retail value is approximately $185,100.• The lessor incurs no material initial direct costs.• The
collectibility of the rentals is reasonably assured, and there are no important uncertainties
surrounding the amount of unreimbursable costs yet to be incurred by the lessor.• The lessor
estimates that the fair value is expected to be significantly greater than $1 at the end of the
lease term.The lessor calculates that the present value on January 1, 2016 of 8 annual
payments in advance of $35,000 discounted at 14% is $185,090.68 (the $1 purchase option is
ignored as immaterial).Required:1. Identify the classification of the lease transaction from
Ballieu’s point of view. Give the reasons for your classification.2. Prepare all the journal entries
for Ballieu for the years 2016 and 2017.3. Discuss the disclosure requirements for the lease
transaction in Ballieu’s notes to the financial statements.View Solution:
On January 1 2016 Ballieu Company leases specialty equipment with

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