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Umbrella Travel enters into an agreement with Destinations Inc. to lease a car on December 31, 2019. The following information relates to this agreement. 1.
Umbrella Travel enters into an agreement with Destinations Inc. to lease a car on December 31, 2019. The following information relates to this agreement. 1. The term of the non-cancelable lease is 3 years with no renewal or bargain purchase option. The remaining economic life of the car is 3 years, and it is expected to have no residual value at the end of the lease term. 2. The fair value of the car was $15,000 at commencement of the lease. 3. Annual payments are required to be made on December 31 at the end of each year of the lease, beginning December 31, 2020. The first payment is to be of an amount of $5,552.82, with each payment increasing by a constant rate of 5% from the previous payment (i.e., the second payment will be $5,830.46 and the third and final payment will be $6,121.98). 4. Umbrella Travel's incremental borrowing rate is 8%. The rate implicit in the lease is unknown. 55. Umbrella Travel uses straight-line depreciation for all similar cars. Instructions a. Prepare Umbrella Travel's journal entries for 2019, 2020, and 2021. Present Value of Rental Payments PV of first payment 5,553 PV of second payment 5,830 PV of third payment 6,122 SPV of rental payments $ 17,505.00 12/31/2019 Right-of-Use Asset Lease Liability To record initial lease 15,000 12/31/2020 12/31/2020 To record first lease payment To record amortization 12/31/2021 12/31/2021 To record second lease payment To record amortization 15,000
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