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Indicate the type of lease eubank company has entered

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Reference no: EM133016958

Question - Eubank Company, as lessee, enters into a lease agreement on July 1, 2021, with Daly Company for equipment. The following data are relevant to the lease agreement:

-The term of the noncancelable lease is 5 years. Payments are due on July 1 of each year beginning at the inception of the lease.

-The fair value of the equipment on July 1, 2021 is $3,500,000 and has a cost to Daly of $3,000,000.

-The equipment has an economic life of 6 years with a guaranteed residual value of $500,000. The equipment is expected to have a value of $500,000 at the end of the lease. The equipment is returned to Daly at the end of the lease.

-Eubank depreciates similar machinery it owns on the straight-line basis.

-Eubank's incremental borrowing rate is 10% per year. The lessee is unaware of the lessor's rate.

Required -

1. Indicate the type of lease Eubank Company has entered into and what accounting treatment is applicable.

2. Prepare the journal entries on Eubank's books that relate to the lease agreement for the following dates: (Round all amounts to the nearest dollar. Include an amortization schedule.)

-July 1, 2021.

-December 31, 2021.

-July 1, 2022.

3. Prepare the journal entries on Daly's books related to the lease for the same dates as in (b).

Reference no: EM133016958

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