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Q14P_c

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Intermediate Accounting (Kieso)
Found in: Page 1249

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Short Answer

(Lessee Computations and Entries, Capital Lease with Guaranteed Residual Value) Assume the same data as in P21-13 and that Chambers Medical Center has an incremental borrowing rate of 10%.

Lessor Computations and Entries, Sales-Type Lease with Guaranteed Residual Value) Amirante Inc. manufactures an X-ray machine with an estimated life of 12 years and leases it to Chambers Medical Center for a period of 10 years. The normal selling price of the machine is $411,324, and its guaranteed residual value at the end of the noncancelable lease term is estimated to be $15,000. The hospital will pay rents of $60,000 at the beginning of each year and all maintenance, insurance, and taxes. Amirante Inc. incurred costs of $250,000 in manufacturing the machine and $14,000 in negotiating and closing the lease. Amirante Inc. has determined that the collectibility of the lease payments is reasonably predictable, that there will be no additional costs incurred, and that the implicit interest rate is 10%.

Instructions

(c) Prepare all of the lessee’s journal entries for the first year.

The debit and credit side of the journal is $546,088

See the step by step solution

Step by Step Solution

Step 1:Meaning of Interest revenue

Interest revenue is the income earned by trade from any investments it makes or the debt it holds. Interest revenue can be found by deducting present value with rental payments. The difference amount is multiplied by the implicit interest rate

Step 2: Preparing journal entries (Lessee)

Date

Particular

Debit ($)

Credit ($)

Beginning of the Year

Leased Equipment

411,324

Lease Liability

411,324

(To record the lease of x-ray equipment using the capital lease method)

Lease Liability

60,000

Cash

60,000

(To record payment of annual lease obligation)

End of the Year

Interest Expense

35,132

Interest Payable

35,132

(To record accrual of annual interest on lease obligation)

Depreciation Expense

39,632

Accumulated Depreciation

Capital Leases

39,632

(To record depreciation expense for year 1 using the straight-line method)

Working Notes:

Calculation of accumulated depreciation

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