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Problem 21-1 Flounder Leasing Company agrees to lease machinery to Culver Corporation on January 1, 2017. The following information relates to the lease agreement. 1.
Problem 21-1
Flounder Leasing Company agrees to lease machinery to Culver Corporation on January 1, 2017. 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 $569,000, and the fair value of the asset on January 1, 2017, is $682,000. | |
3. | At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $101,000. Culver depreciates all of its equipment on a straight-line basis. | |
4. | The lease agreement requires equal annual rental payments, beginning on January 1, 2017. | |
5. | The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor. | |
6. | Flounder desires a 9% rate of return on its investments. Culvers incremental borrowing rate is 10%, and the lessors implicit rate is unknown. |
(Assume the accounting period ends on December 31.)
Part A: Prepare the journal entries Culver would make in 2017 and 2018 related to the lease arrangement.
Date | Account Title | Debit | Credit |
1/1/17 | |||
. | |||
(To record the lease) | |||
. | |||
. | |||
(To record lease payment) | |||
12/31/17 | |||
. | |||
(To record depreciation) | |||
. | |||
. | |||
(To record interest) | |||
1/1/18 | |||
. | |||
. | |||
12/31/18 | |||
. | |||
(To record depreciation) | |||
. | |||
. | |||
(To record interest) |
Part B: Prepare the journal entries Flounder would make in 2017 and 2018.
Date | Account Title | Debit | Credit |
1/1/17 | |||
. | |||
. | |||
. | |||
(To record the lease) | |||
. | |||
. | |||
(To record lease payment) | |||
Date ?? | |||
. | |||
Date ?? | |||
. | |||
. | |||
Date ?? | |||
. |
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