Question
Company leases non-specialized equipment for 5 years. The lease is noncancelable, and Morikawa agrees to pay $50,000 annually at the beginning of each year.
Company leases non-specialized equipment for 5 years. The lease is noncancelable, and Morikawa agrees to pay $50,000 annually at the beginning of each year. Letlow Inc., the lessor, paid $2,500 in commissions to the salesperson at the inception of the lease. On November 1 of each year, Morikawa pays property taxes of $1,500 and insurance of $500. The cost of the equipment is $185,000, and the fair value of the equipment is $220,000. The equipment has an estimated useful life of 7 years. The estimated residual value at the end of 5 years is $31,000 and is not guaranteed by Morikawa. There is no bargain purchase option in the lease or any agreement to transfer ownership at the end of the lease to the lessee. The implicit interest rate is 12%. Except that the estimated residual value of $31,000 is guaranteed by Morikawa. Morikawa believes it is probable that the payment under the residual value guarantee is $15,000. Required: 1. Identify the type of lease involved for Morikawa. Criteria #099 99 2. Prepare appropriate journal entries for Year 1 for Morikawa. For compound entries, if an amount box does not require an entry, leave it blank. Round your answers to the nearest cent and use the rounded answer for the subsequent calculations. Jan. 1 1. Transfer of ownership at end of lease 2. Bargain purchase option 3. Lease term is for a major part of its economic life 4. Present value of lease payments and any guaranteed residual value equals or exceeds substantially all of the fair value 5. Specialized nature of the asset Determine what type of lease this is for Morikawa. Operating lease Jan. 1 Oct. 1 Dec. 31 Dec. 31 0 000 0 0 0 0 0 0 0
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