Reference no: EM132462691
Problem - Pronghorn Corporation leased equipment to Larkspur, Inc. on January 1, 2020. The lease agreement called for annual rental payments of $1,179 at the beginning of each year of the 3-year lease. The equipment has an economic useful life of 7 years, a fair value of $8,900, a book value of $6,900, and Pronghorn expects a residual value of $6,400 at the end of the lease term. Pronghorn set the lease payments with the intent of earning a 5% return, though Larkspur is unaware of the rate implicit in the lease and has an incremental borrowing rate of 7%. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature.
Required -
a) Determine the nature of the lease to both Pronghorn and Larkspur.
b) Make all necessary journal entries for Larkspur in 2020.
c) How would the measurement of the lease liability and right-of-use asset be affected if, as a result of the lease contract, Larkspur was also required to pay $600 in commissions, prepay $700 in addition to the first rental payment, and pay $250 of insurance each year?
d) Suppose, instead of a 3-year lease term, Larkspur and Pronghorn agree to a one-year lease with a payment of $1,179 at the start of the lease. Prepare necessary journal entry for Larkspur in 2020.
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