Question
Hughey Co., as lessee, records a finance lease of machinery on January 1, 2020. The seven annual lease payments of $858,969 are made at the
Hughey Co., as lessee, records a finance lease of machinery on January 1, 2020. The seven annual lease payments of $858,969 are made at the beginningof each year, starting Jan. 1, 2020. There is a guaranteed residual of $500,000, but Hughey believes the expected value of the machine at the end of the lease to be in excess of that amount. Hugheys incremental borrowing rate is 10% and the implicit rate used by lessor is also 10%. Hughey uses the effective-interest method of amortization and straight-line depreciation (no residual value). Round all calculations to the nearest dollar.
a) What is the amount that Hughey should capitalize (round this number to the nearest $10) ?
b) What is the amount that the lessor should record as a Lease Receivable (round this number to the nearest $10)?
c) Prepare the necessary entries at Jan. 1, 2020 for Hughey (2 entries):
d) Prepare all necessary entries at Dec. 31, 2020 for Hughey. (Hint: on your own, prepare an amortization schedule for Hughey to amortize the lease liability to assist you in calculating the necessary entry at 12/31). You should have two entries. Round all calculation to the nearest $1
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