Question
Garvey Company (the lessee) entered into an equipment lease into an equipment lease with Richie Company (the lessor) on January 1 of Year 1.1. The
Garvey Company (the lessee) entered into an equipment lease into an equipment lease with Richie Company (the lessor) on January 1 of Year 1.1. The equipment reverts back to the lessor at the end of the lease, and there is no bargin purchase option. 2. The lease term is 5 years and requires Garvey to make annual payments of $65,949.37 at the end of year. 3. The discount rate is 10%, which is implicit in the lease. Garvey knows this, and this rate is lower than its incremental borrowing rate. 4. The equipment's fair value at the lease inception is $250,000. The present value of an ordinary annuity of five payments of $65,949.37 each at 10% is $250,000. 5. The equipment has an estimated economic life of 7 years and has zero residual value at the end of this time. Straight line deprecitation is used for similar assets. 1) Prepare the journal entries that Garvey Company would make in the first year of the lease assuming the lease assuming the lease is classified as a capital lease. However, assume that Garvey is now required to make the $65,949.37 payments on January 1 each year and that the fair value at the lease inception is now $275,000 ($65,949.37 4.169865). If required, round your answer to the nearest cent
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