Question
Wildhorse Incorporated leases a piece of machinery to Novak Company on January 1, 2020, under the following terms. 1. The lease is to be for
Wildhorse Incorporated leases a piece of machinery to Novak Company on January 1, 2020, under the following terms.
1. | The lease is to be for 4 years with rental payments of $16,394 to be made at the beginning of each year. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2. | The machinery has a fair value of $85,662, a book value of $63,920, and an economic life of 10 years. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3. | At the end of the lease term, both parties expect the machinery to have a residual value of $31,960. To protect against a large loss, Wildhorserequests Novak to guarantee $22,720 of the residual value, which Irving agrees to do. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
4. | The lease does not transfer ownership at the end of the lease term, does not have any bargain purchase options, and the asset is not of a specialized nature. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
5. | The implicit rate is 5%, which is known by Novak. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
6. | Collectibility of the payments is probable.
Evaluate the criteria for classification of the lease, and describe the nature of the lease. For the lessee, it is a operating leasefinance leasesales-type lease, and for the lessor, it is a finance leaseoperating leasesales-type lease.
Prepare the journal entries for Novak for the year 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 5,275.)
|
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started