Acc302 Intermediate Accounting: P21-1 On January 1, 2007 the Alice Company leases electronic

Acc302 Intermediate Accounting 
P21-1 Determining Type of Lease and Subsequent Accounting 
On January 1, 2007 the Alice Company leases electronic equipment for five years, agreeing to pay $70,000 annually at the beginning of each year under the noncancelable lease. Superior Electronics Company, the lessor, agrees to pay all executory costs, estimated to be $3,450 per year. The cost and also fair value of the equipment is $500,000. Its estimated life is 10 years. The estimated residual value at the end of five years is $200,000; at the end of 10 years, it is $5,000. There is no bargain purchase option in the lease nor any agreement to transfer ownership at the end of the lease to the lessee. The lessee’s incremental borrowing rate is 12%. During 2007 Superior Electronics pays property taxes of $650, maintenance costs of $1,600, and insurance of $1,200. There are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred by the lessor. Straight-line depreciation is considered the appropriate method by both companies. 

Required 
1. Identify the type of lease involved for Alice Company and Superior Electronics Company and give reasons for your classifications. (Round to two decimal places). 
2. Prepare appropriate journal entries for 2007 for the lessee and lessor (round to the nearest dollar). 
3. If the residual value at the end of five years is guaranteed by Alice, identify the type of lease. Prepare journal entries for 2010 and 2011 for the lessee and the lessor. Also prepare the journal entries for the lessee and the lessor when the lessee pays the guaranteed residual value. 
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