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Essаy Questiоn #2 Under Deck Cоmpаny оn July 1, 2021, enters into а fourteen-year noncancelable lease with Ocean View Corp. for standard use machinery having an estimated useful life of 15 years. The fair value of the machinery at the inception of the lease is $82,000,000. The implicit rate of borrowing rate is 7% and is known to the lessee. Ocean View manufactures the machinery at a cost of $58,800,000 and, when appropriate, uses the straight-line method to depreciate its assets. The lease contains the following provisions: A. Annual Lease payments of $8,549,154.29 are payable at the beginning of each lease period beginning on 7/1/2021. B. No purchase option or transfer of ownership to the lessee is contained in the lease agreement. Requirements: 1) Prepare the appropriate journal entries (including adjusting entries) for both Under Deck Company and Ocean View Corp. during the first six months of the lease term (7/1/2021 thru 1/1/2022). Both companies have calendar year-ends (i.e. 12/31/XX). 2) Describe (one or two sentences) and quantify the impact of the lease on Under Deck's Balance Sheet as of 12/31/21, and the Income Statement for the year ended 12/31/21. Discussion should include identification of classification (e.g. current, etc.) of amounts as applicable to each statement. 3) As a modification to the lease terms above, assume the terms of the lease now includes an unguaranteed residual value of $3 million for the underlying asset - machinery . Describe the impact/changes, if any, to the journal entries of the lessee provided in requirement #1 above - students' answers should quantify any changes in amounts. 4) If the modification in #3 had been a purchase option for $3 million (at the end of the lease term) , describe how the purchase option would have changed the answers prepared for #3. Assume the purchase option is not likely to be exercised at the end of the lease. NOTE: Due to rounding, your amortization table may have a small amount (i.e. < $1) after the last payment
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