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Brendan, Inc. enters into a a contract to lease equipment from Auditing, Ltd. on July 1, 2018. The following data are relevant to the lease
Brendan, Inc. enters into a a contract to lease equipment from Auditing, Ltd. on July 1, 2018. The following data are relevant to the lease agreement:
- The term of the non-cancelable lease is 4 years, with no renewal option. Payments of $978,446 are due on July 1 of each year.
- The fair value of the equipment on July 1, 2018 is $3,500,000. The equipment has an economic life of 6 years with no salvage value.
- Auditing, Ltd. paid $3,200,000 for the equipment.
- Intermediate, Inc. depreciates similar machinery it owns on the straight-line basis.
- The lessee pays all executory costs.
- Brendan, Inc.s incremental borrowing rate is 10% per year. The lessee is not aware that the lessor used an implicit rate of 8% in computing the lease payments.
Required:
- Determine the type of lease for Brendan, Inc. and Auditing.
- Create any amortization schedule that may or not be needed.
- Show the required journal entries for both lessor and lessee for the four-year period.
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