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Buffalo Leasing Company agrees to lease equipment to Carla Corporation on January 1, 2017. The following information relates to the lease agreement. 1. The term
Buffalo Leasing Company agrees to lease equipment to Carla Corporation on January 1, 2017. 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 $525,000, and the fair value of the asset on January 1, 2017, is $713,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $103,000. Carla estimates that the expected residual value at the end of the lease term will be 103,000. Carla amortizes all of its leased equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2017. 5. The collectibility of the lease payments is probable. 6. Buffalo desires a 11% rate of return on its investments. Carla's incremental borrowing rate is 12%, and the lessor's implicit rate is unknown. (Assume the accounting period ends on December 31.) Prepare the journal entries Carla would make in 2017 and 2018 related to the lease arrangement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 58,972.) Date Account Titles and Explanation Debit Credit 1/1/17 Right-of-Use Asset 8280 Lease Liability 648280 (To record the lease.) Lease Liability 26830 Cash 126830 (To record lease payment.) 12/31/17 Amortization Expense 77897 Right-of-Use Asset 77897 (To record amortization.) Interest Expense 62574 | Lease Liability 1 620 62574 (To record interest.) 12/31/18 - Lease Liability 62574 Cash 62574 12/31/18 Amortization Expense 77897 Right-of-Use Asset 77897 Interest Expense 55065 Lease Liability 55065 (To record interest.) Click if you would like to Show Work for this question: Open Show Work
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