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Intermediate Accounting: Reporting...

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

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Use the information in RE20-3. Prepare the journal entries that Garvey Company would make in the first year of the lease assuming the lease is classified as a finance lease. However, assume that Garvey is now required to make the $65,949.37 payments on January 1 each year and that the fair value at the lease inception is now $275,000 ($65,949:37 × 4:169865).

To determine

Prepare the journal entries to record lease transactions in the first year.

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’.

Finance leases: In finance lease all the ownership risks and responsibilities are transferred from the lessor to the lessee.

Prepare the journal entries that Company G would record in the first year of the lease:

DateAccount title and ExplanationPost ref.

Debit

($)

Credit ($)
January 01, 2019Right-of-Use asset $275,000 
    Lease liability  $275,000
 (To record the lease liability)   
     
January 01, 2019Lease liability $65,949.37 
    Cash  $65,949.37
 (To record the payment of lease liability)   
     
December 31, 2019Interest expense (($275,000$65,949.37)×10%) $20,905

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