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Garvey Company ( the lessee ) entered into an equipment lease with Richie Company ( the lessor ) on January 1 , Year 1 .
Garvey Company the lessee entered into an equipment lease with Richie Company the lessor on January Year
The equipment reverts back to the lessor at the end of the lease, and there is no bargain purchase option. The equipment is not specialized for Garvey.
The lease term is years and requires Garvey to make annual payments of $ at the end of each year.
The discount rate is which is implicit in the lease. Garvey knows this rate.
The fair value of the equipment at the lease inception is $ The present value of an ordinary annuity of five payments of $ each at is $
The equipment has an estimated economic life of years and has zero residual value at the end of this time. Straightline depreciation is used for similar assets.
Required:
Prepare the journal entries that Richie Company the lessor would make in the first year of the lease assuming the lease is classified as a salestype lease. Assume that the lessee is required to make payments on December each year. Also assume that Richie had purchased the equipment at a cost of $
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