Reference no: EM132838625
Problem - On January 1, 2017, Diamond Company agreed to lease some equipment from Norton Machinery. Relevant information is as follows:
Inception of Lease: January 1, 2017
Length of the Lease: 4 years
Useful Life of the Equipment: 7 years
Value of Equipment on 1/1/17 $800,000
Equipment reverts to Norton on December 31, 2020
Diamond Guarantees that Equipment will be worth $100,000 on December 31, 2020
Diamond's Incremental Borrowing Rate 10%
Norton's Implicit Rate of Return (assume unknown by Diamond) 8%
Assume that anyone who depreciates the equipment will use the straight-line method, and that the equipment will have a salvage value of $0 on December 31, 2023.
Required -
A. Assuming that lease payments are made at the start of the year, what is the amount of the annual lease payment that will enable Norton to earn their implicit rate of return?
B. Given your answer to Part A, in accordance with US GAAP, what journal entry(s) will Diamond Company prepare in 2017 related to the lease described above. (Note that as of 2017, Diamond Company had not yet adopted ASU 2016-02)
C. Given your answer to Part A, in accordance with US GAAP, what journal entry(s) will Norton Machinery prepare in 2017 related to the lease described above?
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