Question
Marigold Corporation leased equipment to Splish Brothers, Inc. on January 1, 2020. The lease agreement called for annual rental payments of $1,093 at the beginning
Marigold Corporation leased equipment to Splish Brothers, Inc. on January 1, 2020. The lease agreement called for annual rental payments of $1,093 at the beginning of each year of the 3-year lease. The equipment has an economic useful life of 7 years, a fair value of $8,400, a book value of $6,400, and Marigold expects a residual value of $5,900 at the end of the lease term. Marigold set the lease payments with the intent of earning a 4% return, though Splish Brothers is unaware of the rate implicit in the lease and has an incremental borrowing rate of 6%. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature.
(1) Determine the nature of the lease to both Marigold and Splish Brothers.
(2) Prepare all necessary journal entries for Splish Brothers in 2020
(3) How would the measurement of the lease liability and right-of-use asset be affected if, as a result of the lease contract, Splish Brothers was also required to pay $600 in commissions, prepay $750 in addition to the first rental payment, and pay $150 of insurance each year? (Round answers to 0 decimal places, e.g. 5,275.)
(4)Suppose, instead of a 3-year lease term, Splish Brothers and Marigold agree to a one-year lease with a payment of $1,093 at the start of the lease. Prepare necessary journal entry for Splish Brothers in 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started