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Q. 21-9BE

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Intermediate Accounting (Kieso)
Found in: Page 1240

Short Answer

Indiana Jones Corporation enters into a 6-year lease of equipment on January 1, 2017, which requires 6 annual payments of $40,000 each, beginning January 1, 2017. In addition, Indiana Jones guarantees the lessor a residual value of $20,000 at lease-end. The equipment has a useful life of 6 years. Prepare Indiana Jones’ January 1, 2017, journal entries assuming an interest rate of 10%.

PV of rentals is $91,632

PV of Guarantees residual value is $11,289

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Step by Step Solution

Meaning of Lease

A Lease refers to a lawful mutual agreement in which the lessor transfers the right to use the property to the lessee. The lessee must pay lease liability to the lessor as mentioned in the lease agreement.

Preparing Journal Entries

Date

Particular

Debit ($)

Credit ($)

Leased Equipment

202,921

Lease Liability

202,921

Lease Liability

40,000

Cash

40,000

Working Notes:-

Calculation of Leased Equipment amount

PV of rentals

$191,632

PV of guarantees residual value

11,289

$202,921

Note: Present value of an annuity due of 1 for 6 periods at 10%

Present value of 1 for 6 periods at 10%

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