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Anderson Motors specializes in the construction of high-performance hydraulic pumps. Anderson Motors specializes in the construction of high-performance hydraulic pumps. Dry River Farms enters into
Anderson Motors specializes in the construction of high-performance hydraulic pumps.
Anderson Motors specializes in the construction of high-performance hydraulic pumps. Dry River Farms enters into an agreement that requires Anderson to manufacture three pumps to Dry River's specifications. Once the pumps are constructed, Dry River has agreed to lease the pumps for a period of 10 years and to assume all costs and risks associated with ownership. The lease is non- cancelable, becomes effective January 1, 2010 and requires annual rental payments of $621,000 each January 1starting January 1, 2010. Dry River Farm's incremental borrowing rate is 10%. Anderson has structured the lease to yield an implicit 8% rate of return. Dry River Farm's management is aware of this fact. The total cost of constructing the three pumps is $3,900,000. Anderson sells similar pumps for approximately $1,500,000 each. The economic life of the pumps is estimated to be 10 years with no salvage value. Dry River Farms depreciates similar equipment on a straight-line basis. At the end of the lease, the pumps revert to Anderson. Required: Prepare all the necessary journal entries for 2010 related to the leasing arrangement for both the lessor and lessee. LESSOR LESSEEStep by Step Solution
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