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2BE

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Intermediate Accounting (Kieso)
Found in: Page 1240

Short Answer

Waterworld Company leased equipment from Costner Company. The lease term is 4 years and requires equal rental payments of $43,019 at the beginning of each year. The equipment has a fair value at the inception of the lease of $150,000, an estimated useful life of 4 years, and no salvage value. Waterworld pays all executory costs directly to third parties. The appropriate interest rate is 10%. Prepare Waterworld’s January 1, 2017, journal entries at the inception of the lease.

The total debit and credit side of the journal is $193,019.

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Step by Step Solution

Meaning of Rental Payments

The payment which is made by a tenant who receives the property on lease to another tenant is called rental payment. The amount of rent paid is fixed in the agreement made between the tenants.

Preparing Journal Entries

Date

Particular

Debit ($)

Credit ($)

Jan. 1, 2017

Leased Equipment

150,000

Lease Liability

150,000

Jan. 1, 2017

Lease Liability

43,019

Cash

43,019

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