P21.2 (LO2, 4) (Lessee Entries and Statement of Financial Position Presentation)On January 1,

2019, Cage Company contracts to lease equipment for 5years, agreeing to make a payment of

$120,987 at the beginning of each year, starting January 1, 2019. The leased equipment is to be

capitalized at $550,000. The asset is to be amortized on a double-declining-balance basis, and the

obligation is to be reduced on an effective-interest basis. Cage's incremental borrowing rate is 6%,

and the implicit rate in the lease is 5%, which is known by Cage. Title to the equipment transfers to

Cage at the end of the lease. The asset has an estimated useful life of 5 years and no residual value.

Instructions

a.Explain the probable relationship of the $550,000 amount to the lease arrangement.

b.Prepare the journal entry or entries that Cage should record on January 1, 2019.

c.Prepare the journal entries to record amortization of the leased asset and interest expense for the

year 2019.

d.Prepare the journal entry to record the lease payment of January 1, 2020, assuming reversing

entries are not made.

e.What amounts will appear on the lessee's December 31, 2019, statement of financial position

relative to the lease contract?

f.How would the value of the lease liability in partP21.2b. change if Cage also agreed to pay the

fixed annual insurance on the equipment of $2,000 atthe same time as the rental payments?

P21.3 (LO2) (Lessee Entries and Statement of Financial Position Presentation)Ludwick Steel SA,

as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2019. Annual

rental payments of 40,000 are to be made at the beginning of each lease year (December 31). The

interest rate used by the lessor in setting the payment schedule is 6%; Ludwick's incremental

borrowing rate is 8%. Ludwick is unaware of the rate being used by the lessor. At the end of the lease,

Ludwick has the option to buy the equipment for 5,000, considerably below its estimated fair value at

that time. The equipment has an estimated useful lifeof 7 years, with no residual value. Ludwick uses

the straight-line method of depreciation on similar owned equipment.

Instructions

a.Prepare the journal entry or entries, with explanations, that Ludwick should record on December

31, 2019.

b.Prepare the journal entry or entries, with explanations, that Ludwick should record on December

31, 2020. (Prepare the lease amortization schedule for all five payments.)

c.Prepare the journal entry or entries, with explanations, that Ludwick should record on December

31, 2021.

d.What amounts would appear on Ludwick's December 31,2021, statement of financial position

relative to the lease arrangement?