Kaluzniak Corporation leased equipment to Moeller, Inc. on January 1, 2017. The lease agreement called for annual rental payments of $1,137 at the beginning of each year of the 3-year lease. The equipment has an economic useful life of 7 years, a fair value of $7,000, a book value of $5,000, and Kaluzniak expects a residual value of $4,500 at the end of the lease term. Kaluzniak set the lease payments with the intent of earning a 6% return, though Moeller is unaware of the rate implicit in the lease and has an incremental borrowing rate of 8%. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature. (a) Describe the nature of the lease to both Kaluzniak and Moeller.
(b) Prepare all necessary journal entries for Moeller in 2017.
(c) How would the measurement of the lease liability and right-of-use asset be affected if, as a result of the lease contract, Moeller was also required to pay $500 in commissions, prepay $750 in addition to the first rental payment, and pay $200 of insurance each year?
(d) Suppose, instead of a 3-year lease term, Moeller and Kaluzniak agree to a one-year lease with a payment of $1,137 at the start of the lease. Prepare all necessary journal entries for Moeller in 2017.