Question
On 1/1//2018, ABC leases a machine from LeaseCo. for two years. The estimated economic life of the machine is 5 years. At the end of
On 1/1//2018, ABC leases a machine from LeaseCo. for two years. The estimated economic life of the machine is 5 years. At the end of the two-years, ABC must return the machine to LeaseCo. ABC has agreed to guarantee LeaseCo that the residual value at that time will be at least $1,000. The annual lease payments are $5,000 per year and are payable at the BEGINNING of each year (assume payments are made on 1/1/18 and 12/31/18). Assume both parties use straight-line depreciation and/or amortization and that the estimated salvage value of the machine after five years is zero.
LeaseCo is a retail company and uses an implicit rate of 6% to compute the annual lease payments. LeaseCo paid $9,500 to purchase the machine but the estimated sales value (fair value) of the machine is $15,000.
ABC incremental borrowing rate is also 6%. ABC estimates that the fair value of the machine is also $15,000. ABC believes that the expected value of the machine after two years will be only $800 and therefore expects to pay an additional $200 to LeaseCo under the guarantee.
Required
- Prepare all required journal entries for ABC and LeaseCo for 2018 and 2019. Round all numbers to the nearest dollar. If necessary, round interest up or down in the final year to account for any rounding differences.
- Prepare any required journal entries for ABC and LeaseCo at the end of the lease. You should assume that the actual value of machine on 12/31/19 was $940.
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