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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:

  1. Determine the type of lease for Brendan, Inc. and Auditing.
  2. Create any amortization schedule that may or not be needed.
  3. Show the required journal entries for both lessor and lessee for the four-year period.

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