Reference no: EM132865232

Questions -

Q1) Garvey Company (the lessee) entered into an equipment lease with Richie Company (the lessor) on January 1. Prepare the journal entries that Garvey Company would make in the first year of the lease assuming the lease is classified as a FINANCING lease.

Additional information need to make the journal entries

1. The lease term is 5 years and requires Garvey to make annual payments of $65,949.37 at the end of each year.

2. The discount rate is 10% which is implicit in the lease. Garvey knows this rate.

The present value = Lease payment (PV of an ordinary annuity of five payments at 10%)

The present value = $65,949.37 (3.79079) = $250,000

DEBIT CREDIT

Jan 1

Dec 31

Q2) Montevallo Corporation leased equipment from Folio Company. The lease term is 10 years, requires payments of $25,000 at the end of each year, and contains a bargain purchase option. At the end of the lease, Montevallo has an option to pay $4,000 (which is significantly less than the estimated fair value at that time) to purchase the equipment. The lease agreement stipulates that Folio receive a rate of return of 8% each year. Calculate the present value of the lease payments. Round your answer to the nearest dollar.

Q3) Montevallo Corporation leased equipment from Folio Company. The lease term is 10 years, requires payments of $25,000 at the end of each year. Montevallo guarantees the $20,000 estimated residual value at the end of the 10-year lease. Montevallo estimates that it is probable that it will have to pay $15,000 cash due to the residual value guarantee. Calculate the present value of the lease payments. Round your answer to the nearest dollar.

Q4) Garvey Company (the lessee) entered into an equipment lease with Richie Company (the lessor) on January 1. Prepare the journal entries that Richie Company (the lessor) would make in the first year of the lease assuming the lease is classified as a sales-type lease. Assume that the lessee is required to make payments on December 31 each year. Also assume that Richie had purchased the equipment at a cost of $200,000.

Additional information need to make the journal entries

1. The lease term is 5 years and requires Garvey to make annual payments of $65,949.37 at the end of each year.

2. The discount rate is 10% which is implicit in the lease. Garvey knows this rate.

The present value = Lease payment (PV of an ordinary annuity of five payments at 10%)

The present value = $65,949.37 (3.79079) = $250,000

DEBIT CREDIT

Jan 1

Dec. 31