Blossom Leasing Company agrees to lease equipment to Blue Corporation on January 1, 2020. The following information relates to the lease agreement.1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.2. The cost of the machinery is $520,000, and the fair value of the asset on January 1, 2020, is $737,000.3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $60,000. Blue estimates that the expected residual value at the end of the lease term will be 60,000. Blue amortizes all of its leased equipment on a straight-line basis.4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020.5. The collectibility of the lease payments is probable.6. Blossom desires a 10% rate of return on its investments. Blue’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown.(Assume the accounting period ends on December 31.) Prepare the journal entries Blue would make in 2020 and 2021 related to the lease arrangement. (Credit account titles areautomatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles andenter O for the amounts. Round answers to 0 decimal places e.g. 58,972. Record journal entries in the order presented in the problem.)DateAccount Titles and ExplanationDebitCredit1/1/20Right-of-Use AssetLease Liability(To record the lease.)Lease LiabilityCash(To record lease payment.)12/31/20Amortization ExpenseRight-of-Use Asset(To record amortization.)Interest ExpenseLease Liability (To record interest.)1/1/21Lease LiabilityCash12/31/21Amortization ExpenseRight-of-Use Asset(To record amortization.)Interest ExpenseLease Liability(To record interest.)

The given lease is a finance lease because the equipment lease for most of its economic useful…

Answered: 000, and the fair value of the asset on…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Blossom Leasing Company agrees to lease equipment to Blue Corporation on January 1, 2020. The following information relates to the lease agreement.

1.		The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
2.		The cost of the machinery is $520,000, and the fair value of the asset on January 1, 2020, is $737,000.
3.		At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $60,000. Blue estimates that the expected residual value at the end of the lease term will be 60,000. Blue amortizes all of its leased equipment on a straight-line basis.
4.		The lease agreement requires equal annual rental payments, beginning on January 1, 2020.
5.		The collectibility of the lease payments is probable.
6.		Blossom desires a 10% rate of return on its investments. Blue’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown.

(Assume the accounting period ends on December 31.)

Prepare the journal entries Blue would make in 2020 and 2021 related to the lease arrangement. (Credit account titles are
automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and
enter O for the amounts. Round answers to 0 decimal places e.g. 58,972. Record journal entries in the order presented in the problem.)
Date
Account Titles and Explanation
Debit
Credit
1/1/20
Right-of-Use Asset
Lease Liability
(To record the lease.)
Lease Liability
Cash
(To record lease payment.)
12/31/20
Amortization Expense
Right-of-Use Asset
(To record amortization.)
Interest Expense
Lease Liability

(To record interest.)
1/1/21
Lease Liability
Cash
12/31/21
Amortization Expense
Right-of-Use Asset
(To record amortization.)
Interest Expense
Lease Liability
(To record interest.)

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