Problem 21-06 (Part Level Submission) Novak Leasing Company agrees to lease equipment to Splish Corporation on January 1, 2020. The following information relates to the lease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $517,000, and the fair value of the asset on January 1, 2020, is $657,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $55,000. Splish estimates that the expected residual value at the end of the lease term will be 55,000. Splish amortizes all of its leased equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020. 5. The collectibility of the lease payments is probable. 6. Novak desires a 10% rate of return on its investments. Splish's incremental borrowing rate is 11%, and the lessor's implicit rate is unknown. (Assume the accounting period ends on December 31.) Click here to view factor tables. (a) Your answer is correct. Discuss the nature of this lease for both the lessee and the lessor. T finance lease for Splish. T sales-type lease for Novak. SHOW LIST OF ACCOUNTS SHOW SOLUTION LINK TO TEXT LINK TO TEXT Attempts: 1 of 5 used (b) Your answer is correct. Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the e.g. 58,972.) Annual rental payment 117413 SHOW LIST OF ACCOUNTS SHOW SOLUTION LINK TO TEXT LINK TO TEXT Attempts: 2 of 5 (c) Your answer is correct. Compute the value of the lease liability to the lessee. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final a 58,972.) Present value of minimum lease payments 614133 SHOW LIST OF ACCOUNTS SHOW SOLUTION LINK TO TEXT LINK TO TEXT Your answer is correct. Prepare the journal entries Splish would make in 2020 and 2021 related to the lease arrangement. (Credit account titles are automatically inde indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts. Round answers to 0 dec journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit TRight-of-Use Asset 614133 614133 Lease Liability (To record the lease.) Lease Liability 117413 1174137 117413 T Cash (To record lease payment.) 2 | 12/31/20 - ITAmortization Expense 87733 87733 Right-of-Use Asset (To record amortization.) Interest Expense 546397 54639 T Lease Liability (To record interest.) T 1/1/21 Lease Liability 1174137 T Cash 117413 12/31/21 : Tamortization Expense 12/31 Amortization Expense 2 877331 Cash 11/413 12/31/21 4 Amort Amortization Expense 87733 87733 T Right-of-Use Asset (To record amortization.) Interest Expense 47734 47734 T Lease Liability (To record interest.) SHOW LIST OF ACCOUNTS SHOW SOLUTION LINK TO TEXT LINK TO TEXT Attempts: 4 of 5 used Your answer is partially correct. Try again. Prepare the journal entries Novak would make in 2020 and 2021 related to the lease arrangement. (Credit account titles are automatically indented when amou indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts. Round answers to 0 decimal places e.g. 5 journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit T 1/1/20 TLease Receivable Cost of Goods Sold Sales Revenue Inventory tory (To record the lease.) 1/1/20 Cash Lease Receivable (To record lease payment.) 912/31/20 3PLease Receivable Lease Receivable Interest Revenue 77/1/21 cash Deposit Liability TLease Receivable (To record lease payment.) 12/31/20 TLease Receivable Interest Revenue 1/1/21 A ca Deposit Liability 12/31/21 4 Inventory Gain on Lease SHOW LIST OF ACCOUNTS
