esponse. Question 5 On January 1, 2020, Sitra Company leased equipment from National Corporation. Lease payments are $300.000, payable annually beginning on January 1, 2020 for 20 years. The lease is non-cancelable. The following information pertains to the agreement: 1. The fair value of the equipment on January 1, 2020 is $2,550,000. 2. The estimated economic life of the equipment was 25 years on January 1, 2020 with guaranteed residual value of $75.000. 3. The lease is non-renewable. At the termination of the lease, the equipment reverts to the lessor. 4. The lessor's implicit rate is 10% which is known to Sitra. Sitra's incremental borrowing rate is 12% (The PV of $1 for 20 periods at 10% is 0.14864 and the PV for an ordinary annuity of $1 for 20 periods at 10% is 8.51356). 5. Sitra uses straight-line method for depreciation. Instructions: A) Compute the present value of minimum lease payments. B) Prepare all necessary journal entries on the lessee's books for the year 2020.
esponse. Question 5 On January 1, 2020, Sitra Company leased equipment from National Corporation. Lease payments are $300.000, payable annually beginning on January 1, 2020 for 20 years. The lease is non-cancelable. The following information pertains to the agreement: 1. The fair value of the equipment on January 1, 2020 is $2,550,000. 2. The estimated economic life of the equipment was 25 years on January 1, 2020 with guaranteed residual value of $75.000. 3. The lease is non-renewable. At the termination of the lease, the equipment reverts to the lessor. 4. The lessor's implicit rate is 10% which is known to Sitra. Sitra's incremental borrowing rate is 12% (The PV of $1 for 20 periods at 10% is 0.14864 and the PV for an ordinary annuity of $1 for 20 periods at 10% is 8.51356). 5. Sitra uses straight-line method for depreciation. Instructions: A) Compute the present value of minimum lease payments. B) Prepare all necessary journal entries on the lessee's books for the year 2020.
Chapter1: Financial Statements And Business Decisions
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