(Assume the accounting period ends on December 31.)Prepare the journal entries Fat Choi Furniture would make in 2020 and 2021 related to the lease arrangement. Leasing AG agrees to lease equipment to Fat Choi Furniture on January 1, 2020. The followinginformation relates to the lease agreement.1. The term of the lease is 8 years with no renewal option, and the machinery has an estimatedeconomic life of 9 years.2. The cost of the machinery is $1,312,500, and the fair value of the asset on January 1, 2020, is$1,750,000.3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residualvalue of $125,000. Fat Choi Furniture estimates that the expected residual value at the endof the lease term will be $100,000. Fat Choi Furniture amortizes all of its leased equipmenton 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. Fat Choi Furniture's incremental borrowing rate is 6%. Leasing AG desires a 5% rate ofreturn on its investments, and Fat Choi Furniture is aware of it. Both companies consider thelease as finance lease.

Lease agreement: Lease agreement can be defined as the legal agreement between the owner of the…

Answered: Assume the accounting period ends on…

Assume the accounting period ends on December 31.) Prepare the journal entries Fat Choi Furniture would make in 2020 and 2021 related to the lease arrangement.

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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Concept explainers

Leasing

Leasing is a contractual arrangement in which someone (a lessee) pays the owner (or lessor) of a building, land, vehicle, or other asset for the use of that asset. The lease is the agreement between lessee and lessor.

Question

(Assume the accounting period ends on December 31.)
Prepare the journal entries Fat Choi Furniture would make in 2020 and 2021 related to the lease arrangement.

Leasing AG agrees to lease equipment to Fat Choi Furniture on January 1, 2020. The following
information relates to the lease agreement.
1. The term of the lease is 8 years with no renewal option, and the machinery has an estimated
economic life of 9 years.
2. The cost of the machinery is $1,312,500, and the fair value of the asset on January 1, 2020, is
$1,750,000.
3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual
value of $125,000. Fat Choi Furniture estimates that the expected residual value at the end
of the lease term will be $100,000. Fat Choi Furniture 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. Fat Choi Furniture's incremental borrowing rate is 6%. Leasing AG desires a 5% rate of
return on its investments, and Fat Choi Furniture is aware of it. Both companies consider the
lease as finance lease.

Definition Definition Method of recording financial transactions in the book of original entry by debiting and crediting the accounts affected by a transaction using the golden rules of accrual accounting.

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