Question
On January 1, 2021, Fremont Co. leased equipment from Newton Instruments Inc. who is the manufacture. The lease has a four-year term ending December 31,
On January 1, 2021, Fremont Co. leased equipment from Newton Instruments Inc. who is the manufacture. The lease has a four-year term ending December 31, 2024, at which time possession of the leased asset will revert back to Newton. The equipment has a fair value of $841,533 and an expected economic life of five years. Newton expects the residual value at December 31, 2024 to be $100,000. The cost of the equipment to Newton is $650,000. Equal payments under the lease are due on Dec. 31 of each year with the first payment being made on December 31, 2021. Fremont is aware that Newton used a 6% interest rate when calculating lease payments. Both firms have 12/31 fiscal year ends.
1) Provide the Lessors and Lessees amortization schedule for the lease assuming: A. The expected residual value of $100,000 is not guaranteed. B. The expected residual value of $100,000 is guaranteed by the lessee. C. Negotiations led to the lessee guaranteeing a $150,000 residual value. 2) Provide the Lessors journal entry at inception of the lease assuming that the lessee guarantees a residual value of $150,000.
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