Exercise 21-12 (Part Level Submission)

On January 1, 2020, Wildhorse 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 $3,000, while the expected residual value at the end of the lease is $8,000

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

4. The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight-line basis

5. Wildhorse set the annual rental to ensure a 7% rate of return. Flynns incremental borrowing rate is 8%, and the implicit rate of the lessor is unknown

6. Collectibility of lease payments by the lessor is probable

Both the lessor and the lessees accounting periods end on December 31.

A. Discuss the nature of this lease to Wildhorse and Flynn

-The nature of this lease for Wildhorse is a sales-type lease

- The nature of this lease for Flynn is a finance lease

B. Calculate the amount of the annual rental payment

- Annual rental payment

C. Prepare all the necessary journal entries for Wildhorse for 2020.

D. Suppose the collectibility of the lease payments was not probable for Wildhorse. Prepare all necessary journal entries for the company in 2020.

E. Prepare all the necessary journal entries for Flynn for 2020.