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How museo should account for the lease

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Reference no: EM132979436

On January 1, 2019, Museo Plc (the lessor) entered a four-year lease with Arc Plc (the lessee) on the following terms:

  1. An initial payment of $120,000 is due on January 1, 2019 followed by four payments of $70,000 at the end of each year.
  2. The leased asset has an estimated useful life of 15 years.
  3. Title to the leased asset is transferred to Museo at the end of the lease term.
  4. Arc's incremental borrowing rate is 12%.
  5. The asset is depreciated using a straight-line depreciation method.
  6. The asset's estimated salvage value is $300,000 after 4 years and $15,000 after 15 years.

Problem 1: Explain how Museo should account for this lease and pepare journal entries for Museo to record the receipt of payments in years 1 and 2 of the lease.

Reference no: EM132979436

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