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Garvey Company (the lessee) entered into an equipment lease with Richie Company (the lessor) on January 1 of Year 1. 1. The equipment reverts back
Garvey Company (the lessee) entered 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 bargain purchase option. The equipment is not specialized for Garvey. 2. The lease term is 5 years and requires Garvey to make annual payments of $65,949.37 at the end of each year. 3. The discount rate is 10%, which is implicit in the lease. Garvey knows this rate. 4. The fair value of the equipment 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 depreciation is used for similar assets. Required: Prepare the journal entries that Garvey Company would make in the first year of the lease assuming the lease is classified as a finance lease. Assume that Garvey is required to make payments on December 31 each year. CHART OF ACCOUNTS Garvey Company General Ledger ASSETS REVENUE 111 Cash 411 Sales Revenue 121 Accounts Receivable 141 Inventory EXPENSES 152 Prepaid Insurance 500 Cost of Goods Sold 181 Equipment 511 Insurance Expense 189 Accumulated Depreciation 512 Utilities Expense 190 Right-of-Use Asset 521 Salaries Expense 532 Bad Debt Expense LIABILITIES 535 Amortization Expense 211 Accounts Payable 540 Interest Expense 231 Salaries Payable 541 Depreciation Expense 250 Unearned Revenue 559 Miscellaneous Expenses 253 Lease Liability 910 Income Tax Expense 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings Prepare the journal entries that Garvey Company would make in the first year of the lease assuming the lease is classified as a finance lease. Assume that Garvey is required to make payments on December 31 each year. General Journal Instructions PAGE 1 GENERAL JOURNAL DATE ACCOUNT TITLE POST. REF. DEBIT CREDIT 1 Jan. 1 250,000.00 2 3 4 5 6 7
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