Question
Crane Company, as lessee, enters into a lease agreement on July 1, 2021, for equipment. The following data are relevant to the lease agreement: 1.
Crane Company, as lessee, enters into a lease agreement on July 1, 2021, for equipment. The following data are relevant to the lease agreement:
1. | The term of the noncancelable lease is 4 years, with no renewal option. Payments of $852,380 are due on July 1 of each year. | |
2. | The fair value of the equipment on July 1, 2021 is $3,010,000. The equipment has an economic life of 6 years with no salvage value. | |
3. | Crane depreciates similar machinery it owns on the sum-of-the-years'-digits basis. | |
4. | The lessee pays all executory costs. | |
5. | Crane's incremental borrowing rate is 11% per year. The lessee is aware that the lessor used an implicit rate of 9% in computing the lease payments. |
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(a)
Indicate the type of lease Crane Company has entered into and what accounting treatment is applicable. Finance LeaseOperating Lease
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(b)
Prepare the journal entries on Crane's books that relate to the lease agreement for the following dates: (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 5,250.)
1. | July 1, 2021. | |
2. | December 31, 2021. | |
3. | July 1, 2022. | |
4. | December 31, 2022. |
Date | Account Titles and Explanation | Debit | Credit | |
July 1, 2021December 31, 2021July 1, 2022December 31, 2022 | ||||
July 1, 2021December 31, 2021July 1, 2022December 31, 2022 | ||||
(To record amortization.) | ||||
July 1, 2021December 31, 2021July 1, 2022December 31, 2022 | ||||
(To record interest payment.) | ||||
| ||||
July 1, 2021December 31, 2021July 1, 2022December 31, 2022 | ||||
(To record amortization.) | ||||
July 1, 2021December 31, 2021July 1, 2022December 31, 2022 | ||||
(To record interest payment.) |
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