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Question: Goring Dairy leases its milking equipment from King Finance Company under the following lease terms. 1. The term of the lease is 10 years
Question: Goring Dairy leases its milking equipment from King Finance Company under the following lease terms. 1. The term of the lease is 10 years with no renewal option, and the equipment has an estimated economic life of 15 years. The equipment is not of a specialized nature. 2. The lease is non-cancellable and requires equal rental payments due at the beginning of each year starting January 1, 2022. 3. The equipment has a fair value at the commencement of the lease (January 1, 2022) of $242,741 and a cost of $180,000 on King Finance's books. 4. Upon termination of the lease, the equipment reverts to King Finance and has a guaranteed residual value of $50,000. Goring Dairy estimates that the expected residual value at the end of the lease term will be $45,000. Goring Dairy depreciates similar equipment that it owns on a straight-line basis. 5. King Finance desires an 8% rate of return on its investments. Goring Dairy's incremental borrowing rate is 9%, and the lessor's implicit rate is unknown. 6. Collectability of the lease payments is probable. Required: (Round all amounts to the nearest dollar.) (a) Calculate the amount of the annual rental payment required. (b) Discuss the nature of this lease agreement to the lessor. (c) Prepare the journal entries King Finance would make in 2022 and 2023 related to the lease arrangement. (d) Calculate the initial amount of lease liability to the lessee. (e) Prepare the journal entries Goring Dairy would make in 2022 and 2023 related to the lease arrangement. (1) Assume that Goring Dairy incurs legal fees related to the execution of the lease of $3,000. In addition, assume Goring Dairy receives a lease incentive from King Finance of $5,000 to enter the lease. Prepare the journal entry to record initial recognition of the lease on the books of Goring Dairy on January 1, 2022. (g) Assume that the residual value of $50,000 had not been guaranteed at all: i. Prepare the journal entry to record initial recognition of the lease on the books of King Finance on January 1, 2022. ii. Calculate the initial amount of the lease liability to Goring Dairy
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