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What do the Journal Entries for the following look like? Thank you. Terry has traditionally purchased all of its manufacturing equipment. However, in Year 3
What do the Journal Entries for the following look like? Thank you.
Terry has traditionally purchased all of its manufacturing equipment. However, in Year 3 they were unable to find a vendor willing to sell them a new $4,094,000 machine. After some careful negotiations, however, they were able to lease the needed equipment for 5 years. At the end of the lease Terry will have the option to purchase the equipment for $328,000, the estimated fair value at the end of the lease. They currently plan to exercise the option and keep the equipment at the end of the lease, but that could change if they find a better option. The machine has an estimated economic life of 7 years with no salvage value. The payments on the lease will be $794,755. Terry does not know the implicit interest rate used by the vendor, but their incremental interest rate is 6.0%. The lease period began on September 1, Year 3 and the first payment was made that day. Subsequent payments will be made each year and should be paid one day before the start date to ensure that no late penalties are accrued. In addition to the first payment, Terry paid $16,000 in legal and other lease origination fees on September 1, Year 3. Terry has decided to keep all of its accumulated depreciation in one account rather than create a separate account for leased assets. Terry has traditionally purchased all of its manufacturing equipment. However, in Year 3 they were unable to find a vendor willing to sell them a new $4,094,000 machine. After some careful negotiations, however, they were able to lease the needed equipment for 5 years. At the end of the lease Terry will have the option to purchase the equipment for $328,000, the estimated fair value at the end of the lease. They currently plan to exercise the option and keep the equipment at the end of the lease, but that could change if they find a better option. The machine has an estimated economic life of 7 years with no salvage value. The payments on the lease will be $794,755. Terry does not know the implicit interest rate used by the vendor, but their incremental interest rate is 6.0%. The lease period began on September 1, Year 3 and the first payment was made that day. Subsequent payments will be made each year and should be paid one day before the start date to ensure that no late penalties are accrued. In addition to the first payment, Terry paid $16,000 in legal and other lease origination fees on September 1, Year 3. Terry has decided to keep all of its accumulated depreciation in one account rather than create a separate account for leased assets
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