Let's break down the requirements and provide a final summary based on the information given. --- ## **Lease Details Summary** - **Lease Payments:** $122,913 per quarter (beginning of each period) - **Lease Term:** 5 years (20 quarters) - **No residual value, no purchase option** - **Economic Life of Asset:** 5 years - **Interest Rate:** 8% - **Fair Value of Asset:** $2,050,000 --- ## **Required Answers** ### **1. Lease Classification by Pernicious Pineapples (Lessee)** **Analysis:** Under ASC 842 (US GAAP), a lease is classified as a **finance lease** by the lessee if any of the following criteria are met: - Lease transfers ownership by the end of the term. - Lease contains a purchase option that is reasonably certain to be exercised. - Lease term is for the major part (generally 75% or more) of the economic life. - Present value of lease payments equals or exceeds substantially all (generally 90% or more) of the fair value of the asset. **Here:** - Lease term = economic life (5 years). - No transfer of ownership or purchase option. - Present value of lease payments likely equals fair value (since lease payments are designed for full payout). **Conclusion:** **Classified as a Finance Lease** by Pernicious Pineapples. --- ### **2. Lease Classification by Mid-South Wholesale (Lessor)** **Analysis:** Under ASC 842, a lessor classifies a lease as a **sales-type** lease if it meets any of the following: - Lease transfers ownership. - Contains a purchase option that is reasonably certain to be exercised. - Lease term is for the major part of the economic life. - Present value of lease payments equals or exceeds substantially all of the fair value. **Here:** - Lease term = economic life. - Lease payments equal the fair value of the asset. - No purchase option or ownership transfer. **Conclusion:** **Classified as a Sales-Type Lease** by Mid-South Wholesale. --- ### **3. Journal Entries through April 1, 2024 (Second Rental Payment)** #### **A. Pernicious Pineapples (Lessee):** **At Lease Inception (Jan 1, 2024):** - Recognize Right-of-Use Asset and Lease Liability at present value of lease payments. *Assume PV = $2,050,000 (since payments match fair value and rate is given):* ``` Dr. Right-of-Use Asset $2,050,000 Cr. Lease Liability $2,050,000 ``` **First Lease Payment (Jan 1, 2024):** - Payment made at beginning, reduces lease liability ``` Dr. Lease Liability $122,913 Cr. Cash $122,913 ``` **Interest and Amortization at March 31, 2024:** - Interest for Q1: ($2,050,000 - $122,913) × 2% = $38,542 (2% is quarterly rate from 8%/4) - Amortization: ($2,050,000 / 20) = $102,500 per quarter (straight-line for simplicity if required) ``` Dr. Interest Expense $38,542 Cr. Lease Liability $38,542 Dr. Amortization Expense $102,500 Cr. Right-of-Use Asset $102,500 ``` **Second Lease Payment (April 1, 2024):** ``` Dr. Lease Liability $122,913 Cr. Cash $122,913 ``` --- #### **B. Mid-South Wholesale (Lessor):** **At Lease Inception (Jan 1, 2024):** - Derecognize asset, recognize lease receivable and sales revenue ``` Dr. Lease Receivable $2,050,000 Cr. Equipment $2,050,000 ``` **First Lease Payment (Jan 1, 2024):** ``` Dr. Cash $122,913 Cr. Lease Receivable $122,913 ``` **Interest Income at March 31, 2024:** - Interest for Q1: ($2,050,000 - $122,913) × 2% = $38,542 ``` Dr. Lease Receivable $38,542 Cr. Interest Income $38,542 ``` **Second Lease Payment (April 1, 2024):** ``` Dr. Cash $122,913 Cr. Lease Receivable $122,913 ``` --- ### **4. If Pernicious Pineapples Leased Directly from Doore Machinery** **Doore Machinery (Manufacturer/Lessor):** - Cost: $1,700,000; Fair Value: $2,050,000; thus, Manufacturer Profit = $350,000 **At Lease Inception (Jan 1, 2024):** - Recognize sales revenue at fair value, cost of goods sold at cost, and lease receivable ``` Dr. Lease Receivable $2,050,000 Cr. Sales Revenue $2,050,000 Dr. Cost of Goods Sold $1,700,000 Cr. Inventory $1,700,000 ``` **First Lease Payment (Jan 1, 2024):** ``` Dr. Cash $122,913 Cr. Lease Receivable $122,913 ``` **Interest Income at March 31, 2024:** - Interest for Q1: ($2,050,000 - $122,913) × 2% = $38,542 ``` Dr. Lease Receivable $38,542 Cr. Interest Income $38,542 ``` **Second Lease Payment (April 1, 2024):** ``` Dr. Cash $122,913 Cr. Lease Receivable $122,913 ``` --- ## **Final Summary** - **Lease is a finance lease for the lessee (Pernicious Pineapples) and a sales-type lease for the lessor (Mid-South Wholesale or Doore Machinery).** - **Both parties recognize the lease at the present value of payments; lessee records a right-of-use asset and liability, lessor records a lease receivable.** - **Journal entries track lease payments, interest, amortization (lessee), and income recognition (lessor).** - **If the lessor is a manufacturer (Doore Machinery), additional entries for sales revenue and cost of goods sold are needed.** Let me know if you need the full amortization schedule or any further breakdown!