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E21.19B (LO 3,4) (Accounting for an Operating Lease) Peres Corporation leased equipment to Chi, Inc. on January 1, 2020. The lease agreement called for annual
E21.19B (LO 3,4) (Accounting for an Operating Lease) Peres Corporation leased equipment to Chi, Inc. on January 1, 2020. The lease agreement called for annual rental payments of $1,377 at the beginning of each year of the 4-year lease. The equipment has an economic useful life of 10 years, a fair value of $11,000, a book value of $7,000, and Peres expects a residual value of $7,500 at the end of the lease term. Peres set the lease payments with the intent of earning a 6% return, though Chi is unaware of the rate implicit in the lease and has an incremental borrowing rate of 8%. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature. Instructions (Round all numbers to the nearest dollar.) (a) Describe the nature of the lease to both Peres and Chi. (b) Prepare all necessary journal entries for Chi in 2020. (c) How would the measurement of the lease liability and right-of-use asset be affected if, as a result of the lease contract, Chi was also required to pay $600 in commissions, prepay $550 in addition to the first rental payment, and pay $320 of insurance each year? (d) Suppose, instead of a 3-year lease term, Peres and Chi agree to a one-year lease with a payment of $1,377 at the start of the lease. Prepare all necessary journal entries for Chi in 2020
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