Question
Lessee Company enters into a six-year finance lease of nonspecialized equipment with Lessor Company on January 1. Lessee has agreed to pay $11,200 annually beginning
Lessee Company enters into a six-year finance lease of nonspecialized equipment with Lessor Company on January 1. Lessee has agreed to pay $11,200 annually beginning immediately on January 1. The lease includes an option for the lessee to purchase the equipment at $1,200, which is $800 below the estimated fair value at lease end. Lessee Company is reasonably certain that it will exercise the purchase option. The economic life of the asset is seven years. The lessees incremental borrowing rate is 7% and the lessors implicit rate is not readily determinable by the lessee.
Record Lessee Companys journal entries on (a) January 1 and (b) December 31 of the first year assuming that the lease is properly classified as a finance lease.
Note: Round your answers to the nearest whole dollar.
Date Account Name Dr. Cr.
a.
Jan. 1 To record asset and liability
Jan. 1 To record cash lease payment
b.
Dec. 31 To record interest
Dec. 31 To record amortization
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