Exercise 21-20

Swifty Corporation leased equipment to Windsor, Inc. on January 1, 2020. The lease agreement called for annual rental payments of $1,193 at the beginning of each year of the 3-year lease. The equipment has an economic useful life of 7 years, a fair value of $9,200, a book value of $7,200, and Swifty expects a residual value of $6,700 at the end of the lease term. Swifty set the lease payments with the intent of earning a 5% return, though Windsor is unaware of the rate implicit in the lease and has an incremental borrowing rate of 7%. 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. Click here to view factor tables. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

a) What is the amount of the rental payments used in the lease agreement? (Round answer to 0 decimal places, e.g. 5,275.)

Rental payments

b) Prepare the entries for Swifty 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.)

c) How would Swiftys accounting in part a change if it incurred legal fees of $500 to execute the lease documents and $600 in advertising expenses for the year in connection with the lease? (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.)