Reference no: EM132568067

Question - For some time, Wongkwang Inc. has maintained a policy of acquiring company equipment by leasing. On January 1, 2020, Wonkwang entered into a lease with Han for a new concrete truck that had a selling price of $315,000. The lease stipulates that annual payments of $60,800 will be made for six years. The first lease payment is made on January 1, 2020, and subsequent payments are made on December 31 of each year. Wonkwang guarantees a residual value of $32,535 at the end of the 6-year period. Wonkwang has an incremental borrowing rate of 11%, and the implicit interest rate to Han is 10% after considering the guaranteed residual value. The economic life of the truck is eight years. Wonkwang uses the calendar year for reporting purposes and straight-line depreciation to depreciate other equipment.

1) Compute the amount to be capitalized as an asset on the lessee's books for the concrete truck. Wonkwang knows that Han's implicit interest rate is 10%.

2) Prepare a schedule showing the reduction of the liability by the annual payments after considering the interest charges, and give the journal entries that would be made on Wonkwang's books for the first two years of the lease.

3) Assume that the lessor sells the truck for $25,000 at the end of the 6-year period to a third party. Give the wonkwang journal entries necessary to record the payment to satisfy the residual guarantee and to write off the leased equipment accounts.