Exercise 21-12 (Part Level Submission) On January 1, 2020, Ivanhoe Company leased equipment to Flynn Corporation. The following information pertains to this lease. 1. The term of the non-cancelable lease is 6 years. At the end of the lease term, Flynn has the option to purchase the equipment for $2,000, while the expected residual value at the end of the lease is $7,000. 2. Equal rental payments are due on January 1 of each year, beginning in 2020. 3. The fair value of the equipment on January 1, 2020, is $120,000, and its cost is $90,000. The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight-line basis. Ivanhoe set the annual rental to ensure a 4% rate of return. Flynn's incremental borrowing rate is 7%, and the implicit rate of the lessor is unknown. 6. Collectibility of lease payments by the lessor is probable. 4. 5. Both the lessor and the lessee's accounting periods end on December 31. Your answer is correct. Calculate the amount of the annual rental payment. (Round answer to 0 decimal places, e.g. 5,275.) Annual rental payment 21721 Your answer is correct. Prepare all the necessary journal entries for Ivanhoe for 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275. Record journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit 1/1/20 Lease Receivable 120000 Cost of Goods Sold 90000 Sales Revenue 120000 90000 Inventory (To record the lease) 1/1/20 Cash 21721 21721 Lease Receivable (To record lease payment) 12/31/20 Lease Receivable 3931 Interest Revenue 3931 Your answer is correct. Suppose the collectibility of the lease payments was not probable for Ivanhoe. Prepare the necessary journal entry for the company in 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit 1/1/20 Cash 21721 Deposit Liability 21721 Your answer is partially correct. Try again. Prepare all the necessary journal entries for Flynn for 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to O decimal places, e.g. 5,275. Record journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit Right-of-Use Asset 118419 1/1/20 118419 Lease Liability (To record the lease) 1/1/20 Lease Liability 26600 26600 Cash (To record the lease payment) 12/31/20 Depreciation Expense 19737 19737 Right-of-Use Asset (To record amortization of the right-of-use asset) 12/31/20 V Interest Expense 3673 3673 Lease Liability (To record interest expense)
