Reference no: EM131979546
Question - On January 1, 2010, Oxford Company leased equipment from Starkville Company. The lease had a non-cancellable ten-year term and required annual lease payments of $19,000 to be paid on January 1 of each year with the first payment due January 1, 2010. The annual payment includes $1,000 for executory costs. Oxford guarantees a $15,000 residual value at the end of the lease term. The estimated economic life of the equipment is 12 years. The fair value of the equipment on January 1, 2010 is $140,000. Oxford's incremental borrowing rate is 10%, and Starkville's implicit interest rate is 9%, which is known by Oxford. Present value factors for interest rates of 9% and 10% are as follows.
9% 10%
Present value of $1 for n = 1 0.917431 0.909091
Present value of $1 for n = 10 0.422411 0.385543
Present value of an ordinary annuity for n = 10 6.417658 6.144567
Present value of an annuity due for n = 10 6.995247 6.759024
Oxford uses straight-line depreciation for its plant assets.
REQUIRED
a. Compute the present value of the minimum lease payments (Show computations).
b. Classify the lease from the standpoint of the lessee, stating the reason for the classification.
c. Prepare each of the following journal entries on the lessee's books (Show computations)
(1) Record the lease agreement on January 1, 2010
(2) Record the payment on January 1, 2010
(3) Record any adjusting entries on December 31, 2010, in connection with the lease agreement.
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