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Ivanhoe Incorporated leases a piece of machinery to Sarasota Company on January 1, 2020, under the following terms. 1. The lease is to be for
Ivanhoe Incorporated leases a piece of machinery to Sarasota Company on January 1, 2020, under the following terms. 1. The lease is to be for 4 years with rental payments of $12,831 to be made at the beginning of each year. 2. The machinery' has a fair value of $68,934, a book value of $51,440, and an economic life of 10 years. 3. At the end of the lease term, both parties expect the machinery to have a residual value of $25,720. To protect against a large loss, Ivanhoe requests Sarasota to guarantee $18,040 of the residual value, which Sarasota agrees to do. 4. The lease does not transfer ownership at the end of the lease term, does not have any bargain purchase options, and the asset is not of a specialized nature. 5. The implicit rate is 5%, which is known by Sarasota. 6. Collectibility of the payments is probable. Click here to view factor tables. (a) Your answer is correct. Evaluate the criteria for classification of the lease, and describe the nature of the lease. For the lessee, it is a finance lease and for the lessor, it is a sales-type lease Prepare the journal entries for Sarasota for the year 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places eg. 5,275.) Date Account Titles and Explanation Debit Credit Jan. 1 Machinery Cash (To record lease) Jan. 1 Cash Machinery (To records first lease payment) Dec. 31 (To record accrued interest) Dec. 31 (To record amortization expense)
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