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Diamond and Pearl are two companies that follow ASPE. Diamond manufactures equipment, which has 14-year economic life. Diamond leases the equipment to Pearl on
Diamond and Pearl are two companies that follow ASPE. Diamond manufactures equipment, which has 14-year economic life. Diamond leases the equipment to Pearl on May 30, 2020. Lease details are as follows: Lease period: 10 years. Fair value and cost of equipment at the start of the lease: $449,284 Residual value guaranteed: $70,000. Lease payment is due annually on May 30: $60,000. No renewal options for the lease and Diamond owns the equipment at the end of the lease. Pearl's incremental interest rate and implicit rate are both 9%. Pearl uses straight-line amortization for the equipment. The collectability of lease payments is reasonably predictable and there will be no additional costs for Diamond. Instructions: a. Prepare the journal entries for the Diamond and Pearl at May 30, 2020, and at December 31, 2020, which is the year end for both the lessee and lessor. (Round factor values to 5 decimal places and final answers to 0 decimal places.) (8 Marks) b. Prepare journal entries at May 30, 2021 for the Diamond and Pearl. (Round factor values to 5 decimal places and final answers to 0 decimal places.) (4 Marks)
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