Question
Bridgeport Leasing Company agrees to lease equipment to Indigo Corporation on January 1, 2020. The following information relates to the lease agreement. 1. The term
Bridgeport Leasing Company agrees to lease equipment to Indigo Corporation on January 1, 2020. The following information relates to the lease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $ 505,000, and the fair value of the asset on January 1, 2020, is $ 719,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $ 45,000. Indigo estimates that the expected residual value at the end of the lease term will be 45,000. Indigo amortizes all of its leased equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020. 5. The collectibility of the lease payments is probable. 6. Bridgeport desires a 9% rate of return on its investments. Indigos incremental borrowing rate is 10%, and the lessors implicit rate is unknown. Prepare the journal entries Bridgeport would make in 2020 and 2021 related to the lease arrangement.
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