Question
19. Downtown Inc. entered into an arrangement on January 1, 2017 to lease a machine for four years with lease payments of $85,000 each year
19. Downtown Inc. entered into an arrangement on January 1, 2017 to lease a machine for four years with lease payments of $85,000 each year with the first payment due immediately and January 1 of each year thereafter. There are no options to extend, terminate, or renew the lease. The lessor requires a return on its leases of this type of 8%, which is the same as Downtown Inc.s marginal borrowing rate. There is the option to purchase the machine at the end of the lease for $25,000, which it is reasonably expected to exercise. The machine is estimated to have a useful life of 6 years. The journal entry to be recorded by Downtown Inc. at the end of 2017 is:
a. Lease Expense $85,000
Current Lease Payable $85,000
b. Lease Payable $66,005.68
Interest Expense $18,994.32
Current Lease Payable $85,000
Amortization Exp. $53,738.17
Leased Asset $53,738.17
c. Lease Payable $66,005.68
Interest Expense $18,994.32
Current Lease Payable $85,000
Amortization Exp. $80,607.25
Leased Asset $80,607.25
d. Lease Payable $67,475.74
Interest Expense $17,192.52
Current Lease Payable $85,000
Amortization Exp. $49,984.42
Leased Asset $49,984.42
20. Golfers Clubs and Co. has its operations primarily in Florida. However, on October 31, 2017, a hurricane struck last year and destroyed nearly all of its golf carts. The company has ordered a large fleet of replacements, but they will not arrive for six months. In the meantime, to meet the needs of its players, it has leased a fleet of golf carts from a local refurbisher for $195,000 per month for those six months with no option to extend or renew. There is no option to buy these golf carts, the golf carts are in total worth $8,000,000, and GCC must return the golf carts to the refurbisher at the end of the lease period. The entire amount of the six month lease is due immediately, as of October 31, 2017. The marginal borrowing rate of GCC is 6.5%. What should the adjusting entry be for this lease at the end of the fiscal year December 31, 2017?
a. Leased Equipment $1,170,000
Lease Payable $1,170,000
b. Prepaid Lease $1,170,000
Cash $1,170,000
c. Leased Equipment $1,141,419.09
Cash $1,170,000
Gain on Lease $ 28,580.91
d. Leased Equipment $1,141,419.09
Lease Payable $1,141,419.09
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