Kaluzniak Corporation leased equipment to Moeller, Inc. on January 1, 2020. The lease agreement called for annual

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Kaluzniak Corporation leased equipment to Moeller, Inc. on January 1, 2020. The lease agreement called for annual rental payments of $1,137 at the beginning of each year of the 3-year lease. The equipment has an economic useful life of 7 years, a fair value of $7,000, a book value of $5,000, and Kaluzniak expects a residual value of $4,500 at the end of the lease term. Kaluzniak set the lease payments with the intent of earning a 6% return, though Moeller is unaware of the rate implicit in the lease and has an incremental borrowing rate of 8%. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature.


Instructions

a. Describe the nature of the lease to both Kaluzniak and Moeller.

b. Prepare all necessary journal entries for Moeller in 2020. Moeller uses straight-line depreciation.

c. How would the measurement of the lease liability and right-of-use asset be affected if, as a result of the lease contract, Moeller was also required to pay $500 in commissions, prepay $750 in addition to the first rental payment, and pay $200 of insurance each year?

d. Suppose, instead of a 3-year lease term, Moeller and Kaluzniak agree to a one-year lease with a payment of $1,137 at the start of the lease. Prepare all necessary journal entries for Moeller in 2020.

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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Related Book For  book-img-for-question

Intermediate Accounting

ISBN: 978-1119503668

17th edition

Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfiel

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