Reference no: EM132969577

The following facts relate to a lease between Cat-A-Pillar Construction Equipment, lessor of many types of heavy equipment such as backhoe's and bulldozers, and Robbie's Road Works.

Robbie leases 4 backhoe's and all are written into one lease agreement with the following terms:

• The term of the noncancelable lease is 5 years, with no renewal option. Payments of $1,118,338 are due on June 30 of each year. The inception of the lease is July 1, 2025.
• The fair value of the equipment on July 1, 2025 is $4,350,000. The equipment has an economic life of 8 years with no residual value. Larry's cost of the equipment is $3,750,000.
• Robbie depreciates similar machinery it owns on the straight-line basis
• Robbie's incremental borrowing rate is 12% per year. Robbie is aware that Cat-A-Pillar used an implicit rate of 9% in computing the lease payments (present value factor for 5 periods at 9%, 3.8897; at 12%, 3.6048, 8 periods at 9%, 5.5348; 12% 4.9678).

Problem 1: Prepare the journal entries for both Robbie and Cat-A-Pillar that relate to the lease agreement for the following dates: (Round all amounts to the nearest dollar.) Assume this lease is a financing lease for the lessee and a sales-type lease for the lessor.

July 1, 2025.
December 31, 2025.
June 30, 2026.