repare the journal entries Jense arrangement. (d) Prepare the journal entries Glaus would make in 20x0 and 20x1. (e) Suppose the residual value was guaranteed rather than unguaranteed. How would this affect Glaus's journal entry on January 1, 20x0? 21-4 Ludwick Steel Company as lessee signed a lease agreement for equipment for a noncancelable period of 5 years, beginning January 1, 20x0. Annual payments of $40,000 are to be made at the beginning of each lease year. These payments include taxes, insurance, and maintenance costs of $3,000 per year. The interest rate used by the lessor in setting the payment schedule is 9%; Ludwick is unaware of this rate and has an incremental borrowing rate of 10%. If Ludwick leases the equipment an additional year after the 5th year, it has the option to buy the equipment for $1,000, considerably below its estimated fair value of $10,000 at that time (albeit not guaranteed in the lease). The equipment has an estimated useful life of 7 years, with no salvage value at that time. Instructions (a) Based on the information presented, what is the apparent fair market value of the equipment on January 1, 20x0? Hint: Think carefully about the lease term if the bargain purchase option is only exercisable after 6 years. (b) Prepare Ludwick'lease amortization schedule for all six payments. (c) Prepare the journal entries that should be recorded by Ludwick for the first full year of the lease. (d) Prepare the journal entry or entries that should be recorded on January 1, 20x5, by Ludwick. 21-5 nitr milking equipment from King Finance Company under the repare the journal entries Jense arrangement. (d) Prepare the journal entries Glaus would make in 20x0 and 20x1. (e) Suppose the residual value was guaranteed rather than unguaranteed. How would this affect Glaus's journal entry on January 1, 20x0? 21-4 Ludwick Steel Company as lessee signed a lease agreement for equipment for a noncancelable period of 5 years, beginning January 1, 20x0. Annual payments of $40,000 are to be made at the beginning of each lease year. These payments include taxes, insurance, and maintenance costs of $3,000 per year. The interest rate used by the lessor in setting the payment schedule is 9%; Ludwick is unaware of this rate and has an incremental borrowing rate of 10%. If Ludwick leases the equipment an additional year after the 5th year, it has the option to buy the equipment for $1,000, considerably below its estimated fair value of $10,000 at that time (albeit not guaranteed in the lease). The equipment has an estimated useful life of 7 years, with no salvage value at that time. Instructions (a) Based on the information presented, what is the apparent fair market value of the equipment on January 1, 20x0? Hint: Think carefully about the lease term if the bargain purchase option is only exercisable after 6 years. (b) Prepare Ludwick'lease amortization schedule for all six payments. (c) Prepare the journal entries that should be recorded by Ludwick for the first full year of the lease. (d) Prepare the journal entry or entries that should be recorded on January 1, 20x5, by Ludwick. 21-5 nitr milking equipment from King Finance Company under the
