Reference no: EM132860904

Question - Garvey Company (the lessee) entered into an equipment lease with Richie Company (the lessor) on January 1 of Year 1.

1. The equipment reverts back to the lessor at the end of the lease, and there is no bargain purchase option. The equipment is not specialized for Garvey.

2. The lease term is 5 years and requires Garvey to make annual payments of $65,949.37 at the end of each year.

3. The discount rate is 10%, which is implicit in the lease. Garvey knows this rate.

4. The fair value of the equipment at the lease inception is $250,000. The present value of an ordinary annuity of five payments of $65,949.37 each at 10% is $250,000.

5. The equipment has an estimated economic life of 7 years and has zero residual value at the end of this time. Straight-line depreciation is used for similar assets.

Required -

1. Make the journal entries that Garvey Company would make in the first year of the lease assuming the lease is classified as a finance lease. Assume that Garvey is required to make payments on December 31 each year.

2. Prepare the journal entries that Garvey Company would make in the first year of the lease assuming the lease is classified as a finance lease. Assume that Garvey is required to make payments on December 31 each year.