On January 1, 2020, Sarasota Company contracts to lease equipment for 5 years, agreeing to make a payment of $140,532 at the beginning of each year, starting January 1, 2020. The leased equipment is to be capitalized at $586,000. The asset is to be amortized on a double-declining-balance basis, and the obligation is to be reduced on an effective-interest basis. Sarasota’s incremental borrowing rate is 6%, and the implicit rate in the lease is Unresolved%, which is known by Sarasota. Title to the equipment transfers to Sarasota at the end of the lease. The asset has an estimated useful life of 5 years and no residual value. Click here to view factor tables. Prepare the journal entries that Sarasota should record on January 1, 2020. Prepare the journal entries to record amortization of the leased asset and interest expense for the year 2020. Prepare the journal entry to record the lease payment of January 1, 2021, assuming reversing entries are not made. What amounts will appear on the lessee’s December 31, 2020, balance sheet relative to the lease contract? How would the value of the lease liability in part b change if Sarasota also agreed to pay the fixed annual insurance on the equipment of $2,000 at the same time as the rental payments?

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter14: Financing Liabilities: Bonds And Long-term Notes Payable

Section: Chapter Questions

Problem 24E: Spath Company borrows 75,000 by issuing a 4-year, noninterest-bearing note to a customer on January...

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On January 1, 2020, Sarasota Company contracts to lease equipment for 5 years, agreeing to make a payment of $140,532 at the beginning of each year, starting January 1, 2020. The leased equipment is to be capitalized at $586,000. The asset is to be amortized on a double-declining-balance basis, and the obligation is to be reduced on an effective-interest basis. Sarasota’s incremental borrowing rate is 6%, and the implicit rate in the lease is Unresolved%, which is known by Sarasota. Title to the equipment transfers to Sarasota at the end of the lease. The asset has an estimated useful life of 5 years and no residual value.

Click here to view factor tables.

Prepare the journal entries that Sarasota should record on January 1, 2020.

Prepare the journal entries to record amortization of the leased asset and interest expense for the year 2020.

Prepare the journal entry to record the lease payment of January 1, 2021, assuming reversing entries are not made.

What amounts will appear on the lessee’s December 31, 2020, balance sheet relative to the lease contract?

How would the value of the lease liability in part b change if Sarasota also agreed to pay the fixed annual insurance on the equipment of $2,000 at the same time as the rental payments?

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