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On January 1, 2019, Garrison, Inc., leased equipment from Hawkins Corporation under a five- year lease term. Hawkins manufactured the equipment at a cost of
On January 1, 2019, Garrison, Inc., leased equipment from Hawkins Corporation under a five- year lease term. Hawkins manufactured the equipment at a cost of $350,000. The equipment's normal selling price is $465,242. The terms of the lease require Garrison to make five equal annual payments of $100,000, beginning on January 1, 2019, and at December 31 from 2019 through 2022. At the end of the five-year lease term ending December 31, 2023, the equipment will be returned to the lessor. It is expected to have a residual value of $50,000. The $50,000 residual value is guaranteed by the lessee. The estimated useful life of the equipment is six years. The lessor's implicit rate, which is known by the lessee is 8%. The lessee's incremental borrowing rate is also 8%. Both companies use straight-line depreciation. INSTRUCTIONS 1. Show how Hawkins Corporation calculated the $100,000 annual lease payments. 2. How should the lease be classified by (a) Garrison, Inc. (the lessee), and (b) Hawkins 3. Prepare the appropriate entries for both Garrison, Inc., and Hawkins Corporation on January 4. Prepare an amortization schedules) describing the pattern of interest over the lease term 5. Prepare the appropriate entries for both Garrison, Inc., and Hawkins Corporation on 6. Prepare the appropriate entries for both Garrison, Inc., and Hawkins Corporation on Corporation (the lessor)? Explain your classifications. 1, 2019. for the lessee and lessor. December 31, 2019 (the second lease payment and amortization) December 31, 2023, assuming the equipment is returned to Hawkins Corporation and the actual residual value on that date is $40,000
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