On July 1, 2011, XYZ Manufacturing Corporation leased equipment to Good Company. The equipment had cost XYZ

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On July 1, 2011, XYZ Manufacturing Corporation leased equipment to Good Company. The equipment had cost XYZ $500,000 to manufacture, and would normally have sold for about $700,000. The eight-year lease was classified as a finance lease for accounting purposes.
The equipment is expected to have a total useful life of 10 years. However, it will be returned to XYZ at the end of the lease. The lease agreement requires equal quarterly payments of $25,566 to be made each September 30, December 31, March 31, and June 30. These payments reflect an annual interest rate of 8%. Good Company closes its books semi-annually, on June 30 and December 31.
Required:
a. Calculate the present value of the payments that will be made under this lease agreement, and show the journal entry that should be made by Good Company on July 1, 2011, to record the inception of the lease.
b. Over what period of time should Good Company depreciate this equipment? Explain your reasoning.
c. Assuming that Good Company uses straight-line depreciation, provide the journal entry that should be made on December 31, 2011, and June 30, 2012, to record the depreciation of the equipment.
d. Provide the journal entries that should be made by Good Company to record the lease payments on:
i. September 30, 2011
ii. December 31, 2011
iii. March 31, 2012
iv. June 30, 2012
e. What values related to the lease will be reported on Good Company's statement of earnings for the six months ended June 30, 2012?
f. What values related to this lease will be reported on the company's June 30, 2012, statement of financial position? Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
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Financial Accounting A User Perspective

ISBN: 978-0470676608

6th Canadian Edition

Authors: Robert E Hoskin, Maureen R Fizzell, Donald C Cherry

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