Question
Peg Co. leased equipment from Howe Corp. on July 1, 2016, for an eight-year period expiring June 30, 2024. Equal payments under the lease are
Peg Co. leased equipment from Howe Corp. on July 1, 2016, for an eight-year period expiring June 30, 2024. Equal payments under the lease are $600,000 and are due on July 1 of each year. The first payment was made on July 1, 2016. The rate of interest contemplated by Peg and Howe is 10%. The cash selling price of the equipment is $3,520,000, and the cost of the equipment on Howe's accounting records is $2,800,000. There is no residual value, so the present value of the rents is $3,520,000. The lease is appropriately recorded as a sales-type lease by Howe Corp. and a capital lease by Peg Co.
Required:
1. Provide the journal entry by Howe Corp (lessor) as of July 1, 2016.
a. At the inception of the lease on July 1, 2016
b. The receipt of the down payment on July 1, 2016
2. Provide the journal entry by Peg Co. (lessee) as of July 1, 2016
a. At the inception of the lease on July 1, 2016
b. The down payment on July 1, 2016
3. Provide the journal entries by Peg Co. as of December 31, 2016
a. To record interest expense and interest payable for the 6-months since the lease was signed.
b. To record depreciation expense for the 6-months since the lease was signed.
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