Operating Lease, Nonlease Components, Lessee. BabyClothing (BC) Enterprises leases digital imaging equipment from Sally Systems Leasing. The lease term is for 3 years and the economic life of the...

Operating Lease, Nonlease Components, Lessee. BabyClothing (BC) Enterprises leases digital imaging equipment from Sally Systems Leasing. The lease term is for 3 years and the economic life of the equipment is 5 years. The lease contract does not contain a purchase option and title will not be transferred at the end of the lease term. The fair value of the equipment is $5,500 and there is no guaranteed residual value. Sally Systems does not offer any incentives to the lessee to enter the lease. BC paid $550 in initial direct costs on the lease commencement date. BC’s incremental borrowing rate is 4% and is used to measure the present value because the lessor’s implicit rate is not readily determinable. The annual lease payments (due on January 1 of each year) are $990, which includes technological consulting over the lease term. The digital imaging equipment is typically leased for $900 per year and the consulting is provided at a price of $450 per year. BC has not made the election to account for each separate lease component along with nonlease components as a single lease component. As a result, the components must be separated.

Required »

a. Classify the lease for BC Enterprises.

b. Prepare the journal entries for the lessee and supporting amortization tables to account for this agreement over the lease term.