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Garcia SE leases equipment to Mercer AG on January 1, 2022. The following information relates to the lease agreement. 1. The term of the lease
Garcia SE leases equipment to Mercer AG on January 1, 2022. The following information relates to the lease agreement. 1. The term of the lease is 5 years with no renewal option, and the machinery has an estimated economic life of 6 years. 2. The cost of the machinery is 800,000, and the fair value of the asset on January 1,2022 , is 1,100,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of 75,000 (amount expected to be paid). Mercer depreciates all of its equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2022. 5. The collectibility of the lease payments is probable. 6. Garcia desires a 9% rate of return on its investments. Mercer's incremental borrowing rate is 11%. Garcia's implicit rate is unknown to Mercer. 7. Both the lessee's and the lessor's accounting periods end on December 31. Click here to view factor tables. Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971 .) Annual Lease Payment eTextbook and Media List of Accounts Prepare the journal entries Garcia would make in 2022 and 2023. (Round answers to 0 decimal places, e.g. 5,125. Credit account titles Compute the present value of the lease payments for Mercer. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971 .) Present Value of the Lease Payments for Mercer eTextbook and Media List of Accounts Date Account Titles and Explanation Debit Credit Jan. 1, 2022 Dec. 31, 2022 Jan. 1, 2023 Dec. 31, 2023 (To record the lease) (To record rental payment) (To record depreciation) (To record interest) (To record depreciation) (To record interest)
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