Question
Blue Corporation leased equipment to Larkspur, Inc. on January 1, 2020. The lease agreement called for annual rental payments of $1,381 at the beginning of
Blue Corporation leased equipment to Larkspur, Inc. on January 1, 2020. The lease agreement called for annual rental payments of $1,381 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 $10,000, a book value of $8,000, and Blue expects a residual value of $7,500 at the end of the lease term. Blue set the lease payments with the intent of earning a 7% return, though Larkspur is unaware of the rate implicit in the lease and has an incremental borrowing rate of 9%. 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.
Part 2 Prepare all necessary journal entries for Larkspur in 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to decimal places, e.g. 5,275. Record journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit (To record the lease) (To record lease payment) Part 3 How would the measurement of the lease liability and right-of-use asset be affected if, as a result of the lease contract, Larkspur was also required to pay $500 in commissions, prepay $750 in addition to the first rental payment, and pay $250 of insurance each year? (Round answers to decimal places, e.g. 5,275.) Lease liability $ Right-of-use-asset $ eTextbook and Media List of Accounts Save for Later Attempts: 0 of 2 used Submit Answer Part 4 Suppose, instead of a 3-year lease term, Larkspur and Blue agree to a one-year lease with a payment of $1,381 at the start of the lease. Prepare necessary journal entry for Larkspur in 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.) Debit Credit Date Account Titles and Explanation 1/1/20
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