Reference no: EM132591368

Question - Hero Company entered into two lease agreements for the acquisition of equipment during 20x5:

Lease 1

Date of lease inception and first lease payment FV of. Jan 2, 20x5

FV of equipment. $120,000

Lease term 6 years

Useful life. 8 years

Residual value: Unguaranteed - End of lease term $11,000 - end of useful life. $4,000

Interest rate implicit in lease. 5.5%

Lease 2

Date of lease inception and first lease payment July 1, 20x5

FV of equipment. $75,000

Lease term. 5 years

Useful life 10years

Residual value: Guaranteed - end of lease term $ 30,000 - end of useful life $5000

Interest rate implicit in lease. 8%

Annual maintenance costs payable on July 1 of each year. $5000

Estimate of fair value of asset at the end of the lease term. $10000

Lease payments made under each of these leases were debited to Administrative expenses. No other entries were made for the leases. For both leases, the lessor took into account the residual value at the end of the lease term when calculating the lease payments.

Required - For each of the leases -

a) Prepare the adjusting journal entries at December 31, 20x5 for each of the two lease agreements.

b) Prepare the journal entries for the year ended December 31, 20x6.

c) Assume ASPE. Redo parts (a) and (b) for both leases.