Novak Leasing Company agrees to lease equipment to Splish Corporation on January 1, 2020. The following information relates to the lease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $520,000, and the fair value of the asset on January 1, 2020, is $737,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $60,000. Splish estimates that the expected residual value at the end of the lease term will be 60,000. Splish amortizes all of its leased equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020. 5. The collectibility of the lease payments is probable. 6. Novak desires a 10% rate of return on its investments. Splishs incremental borrowing rate is 11%, and the lessors implicit rate is unknown. (Assume the accounting period ends on December 31.) Click here to view factor tables. Correct answer iconYour answer is correct. Discuss the nature of this lease for both the lessee and the lessor. This is a finance lease for Splish. This is a sales-type lease for Novak. eTextbook and Media List of Accounts Correct answer iconYour answer is correct. Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,972.) Annual rental payment $ 131872 eTextbook and Media List of Accounts Correct answer iconYour answer is correct. Compute the value of the lease liability to the lessee. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,972.) Present value of minimum lease payments $ 689762 eTextbook and Media List of Accounts Partially correct answer iconYour answer is partially correct. Prepare the journal entries Splish would make in 2020 and 2021 related to the lease arrangement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 58,972. Record journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit 1/1/20 Right-of-Use Asset 718661 Lease Liability 718661 (To record the lease.) Lease Liability 131872 Cash 131872 (To record lease payment.) 12/31/20 Amortization Expense 94094 Right-of-Use Asset 94094 (To record amortization.) Interest Expense 64546 Lease Liability 64546 (To record interest.) 1/1/21 Lease Liability 131872 Cash 131872 12/31/21 Amortization Expense 94094 Right-of-Use Asset 94094 (To record amortization.) Interest Expense 64546 Lease Liability 64546 (To record interest.) eTextbook and MediaAssistance Used List of Accounts Partially correct answer iconYour answer is partially correct. Prepare the journal entries Novak would make in 2020 and 2021 related to the lease arrangement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 58,972. Record journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit 1/1/20 Lease Receivable 737000 Cost of Goods Sold 520000 Sales Revenue 737000 Inventory 520000 (To record the lease.) 1/1/20 Cash 131872 Lease Receivable 131872 (To record lease payment.) 12/31/20 Lease Receivable 60513 Interest Revenue 60513 1/1/21 Cash 131872 Lease Receivable 131872 12/31/21 Lease Receivable 54462 Interest Revenue 54462 eTextbook and Media List of Accounts Incorrect answer iconYour answer is incorrect. Suppose Splish expects the residual value at the end of the lease term to be $50,000 but still guarantees a residual of $60,000. Compute the value of the lease liability at lease commencement. Lease liability $ 719638 eTextbook and Media List of Accounts Attempts: 3 of 5 used Right-of-Use Asset Lease Liability Lease Liability Cash Amortization Expense Right-of-Use Asset Interest Expense Lease Liability Lease Liability Cash Amortization Expense Right-of-Use Asset Interest Expense Lease Liability Lease Receivable Cost of Goods Sold Sales Revenue Inventory Cash Lease Receivable Lease Receivable Interest Revenue Cash Lease Receivable Lease Receivable Interest Revenue