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.
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.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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(Assume the accounting period ends on December 31.)
Prepare the

Transcribed Image Text: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.
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