, Lessor Able enters into a lease agreement to lease a vehicle to Lessee Baker for three years for lease payments of $2,900, payable annually at the end of each year. The Lessee & the Lessor each incurs initial direct costs of $200 to enter into the lease. At the beginning of the lease, both the carrying amount (on Lessor’s books) and fair value of the vehicle are $10,000 and the amount the lessor expects to derive from the vehicle at the end of Year 3 is $3,000. The lessee has an option to purchase the vehicle at the end of the initial lease term at $3,500. The economic life of the vehicle is four years, with zero residual expected at that time. The lessee concludes that it does not have a significant economic incentive to exercise the purchase option and therefore determines the lease term to be three years. Thus, the leased vechile will be returned to the Lessor at the end of three years.

This is a Finance lease for Lessee and a Sales-Type lease for Lessor. Why? Here, the lease term is 75% or more of the useful life of the asset.
REQUIRED:
1.Compute the initial lease liability. What is the implicit rate the lessor charges the lessee?
2. What is the amortization period for the right-of-use asset?
3. Make the Lessee’s entries for the three years. Prepare the amortization table.
4. At the end of Year 3, what is the balance in lease liability and right-of-use asset, respectively?