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Point 1: On January 1, 2020, Fargo Corp. enters into a 10-year non cancellable lease with Wells Limited. Information pertaining to the equipment and the lease follows: Fair value of equipment $6,600,000 Estimated useful life of equipment (in years) 13 Fargo's incremental borrowing rate 6% Semi-annual lease payment amount $444,000 Semi-annual property tax payment (included in the semi-annual lease payment quoted above) $30,000 Residual value guaranteed by Fargo Corp. to Wells Limited $215,000 Lease payments are made on January 1 and July 1 of each year. Fargo uses the straight-line method to depreciate all leased equipment. Wells' implicit rate is unknown to Fargo. Both companies follow aspe.
Required:
Question a) Calculate the present value of the minimum lease payments.
Question b) What kind of lease is this to Fargo? Why?
Question c) make an amortization schedule covering the first 3 years of the lease.
Question d) Prepare the journal entries that Fargo would record during the first year of the lease. Assume that Fargo has a year end of December 31.
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