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On January 1, 2017, Indigo Corp. signs a 5-year noncancelable lease agreement to lease a backhoe from Scherzer Equipment, Inc. The following information pertains to
On January 1, 2017, Indigo Corp. signs a 5-year noncancelable lease agreement to lease a backhoe from Scherzer Equipment, Inc. The following information pertains to this lease agreement.
1. | The agreement requires equal rental payments of $3,020 beginning on January 1, 2017. | |
2. | The fair value of the backhoe on January 1, 2017, is $14,200. | |
3. | The backhoe has an estimated economic life of 6 years, with an unguaranteed residual value of $1,520. Indigo depreciates similar equipment on the straight-line method. | |
4. | The lease is nonrenewable. At the termination of the lease, the backhoe reverts to the lessor. | |
5. | Indigos incremental borrowing rate is 11% per year. The lessors implicit rate is not known by Indigo. | |
6. | The yearly rental payment includes $430 of executory costs related to insurance on the back hoe. |
Prepare the journal entries on the lessees books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2017 and 2018. Indigos corporate year-end is December 31
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