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: Calculate the amount of the annual rental payment required.

Part B: Compute the present value of the minimum lease payments.

Part C: Prepare the journal entries Culver would make in 2017 and 2018 related to the lease arrangement.

Date	Account Title	Debit	Credit
Date (?)
	(To record the lease.)
	(To record lease payment.)
Date (?)
	(To record depreciation.)
	(To record interest.)
1/1/18
Date (?)
	(To record depreciation.)
	(To record interest.)

Part D: 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 (?)