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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Lessee Accounting for Finance Lease On January 1, 2019, Concord Corp. signs a contract to lease nonspecialized manufacturing equipment from Stone Inc. Concord agrees to make lease payments of $47,500 per year.

Additional information pertaining to the lease is as follows:

1. The term of the noncancelable lease is 3 years, with a renewal option at the end of the lease term. Payments are due every January 1, beginning January 1, 2019.

2. The fair value of the manufacturing equipment on January 1, 2019, is $150,000. The equipment has an economic life of 7 years.

3. Concord guarantees that the equipment will have a residual value of $15,000 at the end of the lease term. Concord considers it probable that it will have to pay $5,000 cash at the end of the lease terms to satisfy this residual value guarantee.

4. Concord Corp. depreciates similar assets using the double declining-balance method.

5. Concord’s incremental borrowing rate is 12% per year. Stone’s implicit interest rate is 10% and known by Concord.

6. Concord pays $2,500 per year for maintenance of the equipment and $1,000 in property taxes directly to the applicable third party.

Required:

  1. 1. Next Level Examine and evaluate the lease classification criteria and determine what type of lease this is for Concord.
  2. 2. Prepare a table summarizing the lease payments and interest expense.
  3. 3. Prepare journal entries for Concord for the entire lease period. Assume that the equipment has a fair value of $11,500 at the end of the 3-year lease term.

1.

To determine

Identify the type of lease for Corporation C.

Explanation

Lease: Lease is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.

Identify the type of lease for Corporation C.

CriteriaMet or notRemarks
1. Transfer of ownership at the end of leaseNo
2. Bargain purchase optionNo
3...

2.

To determine

Prepare a summary of table of lease payments and interest expense.

3.

To determine

Prepare the journal entries for Corporation C.

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