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PROBLEM: On January 1, 2019 Day Co. leased a new machine from Parr with the following pertinent information: Lease term 6 years Annual rental payable

PROBLEM:

On January 1, 2019 Day Co. leased a new machine from Parr with the following pertinent information:

Lease term 6 years

Annual rental payable at the beginning of each year $50,000

Useful life of machine 8 years

Days incremental borrowing rate 15%

Implicit interest rate in lease (known by Day) 12%

Present value of annuity of 1 in advance for 6 periods at

12% 4.61

15% 4.35

The lease passes ownership of the machine to Day at the termination of the lease. The cost of the machine on Parrs accounting record is $375,500.

QUESTIONS:

  1. At the beginning of the lease term, Day should record a lease liability of
  1. $375,500
  2. $230,500
  3. $217,500
  4. $0
  1. Is this a capital or operating lease?

  1. Record/Journalize the entry Day should make at the inception/beginning of the lease Jan 1, 2019

  1. Record/journalize Days lease payment at 1/1/ 2019

  1. Record/journalize Days annual interest payment for 2019 (use the effective interest rate method)

  1. How much is Days lease liability (how much he owes) at the end of 2019.

  1. Record/journalize the depreciation @ the end of 2019.

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