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Jones Company leases equipment to Cage Inc. on January 1 , 2 0 1 7 . The following information details the lease contract: a .

  

Jones Company leases equipment to Cage Inc. on January 1,2017. The following information details the lease contract:

a. The lease term is seven years with no renewal or purchase options.
b. The machinery cost Jones $525,000 to construct and has a fair value of $700,000 at the lease inception.
c. The asset reverts to Jones at the end of the lease. Jones estimates the residual value of the asset to be $50,000.
d. Cage has guaranteed the residual value of the asset will be $40,000. Due to hard expected usage of the asset, Cage anticipates the actual residual value to only be $30,000 at the end of the lease.
e. The assets estimated economic life is nine years with a salvage value of $3,000.
f. The lease calls for equal payments to be made at the beginning of each year starting January 1,2017.
g. Both firms have December 31 fiscal year ends and use straight-line depreciation.
h. Jones has priced a 5% implicit rate into the lease. Cages incremental borrowing rate is 6% and it does not know the implicit rate of the lease.
i. Collectability of lease payments is probable.

 
 


Required:

1. Calculate the annual payments Jones will require for the lease.

2. What type of lease is this for both Jones and Cage?

3. Prepare the lessors (Jones) amortization table and show all the journal entries Jones will make for the lease in 2017 and 2018.

4. Prepare the lessees (Cages) amortization table and show all the journal entries Cage will make for the lease in 2017 and 2018.

5. Make the December 31,2023 lease termination entries both Jones and Cage will have to make if the assets residual value is $60,000 at the end of the lease.

6. Make the December 31,2023 lease termination entries both Jones and Cage will have to make if the assets residual value is $20,000 at the end of the lease.

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