ACT 3603 Intermediate Accounting II

1. Deer Company purchased a machine on January 1, 2018, for $3,000,000 for the express purpose of leasing it. The machine was expected to have an eight-year life from January 1, 2018, to have no salvage value, and to be depreciated on a straight- line basis. Deer leases the machine to Stick Company at a total rental of $2,100,000, payable in five annual installments in the following declining pattern; 24% in the first two years, 20% in the third and fourth years and 12% in the last year. The lease payment begins January 1, 2018. In addition to the rent, Stick is required to pay annual executor cost of $27,000 to cover unusual repairs and insurance. The lease does not qualify as capital lease for reporting purposes. Deer incurred initial direct costs of $18,000 in obtaining the lease.

Required: Provide all necessary entries to record the lease transactions for 2018 and 2022 on the books of

a) Deer Company

b) Stick Company