Grouper Dairy leases its milking equipment from Monty Finance Company under the following lease terms. 1. The lease term is 10 years, noncancelable, and requires equal rental payments of $32,700 due at the beginning of each year starting January 1, 2020. 2. The equipment has a fair value at the commencement of the lease (January 1, 2020) of $246,978 and a cost of $274,000 on Monty Finance’s books. It also has an estimated economic life of 15 years and an expected residual value of $13,800, though Grouper Dairy has guaranteed a residual value of $21,600 to Monty Finance. 3. The lease contains no renewal options, and the equipment reverts to Monty Finance upon termination of the lease. The equipment is not of a specialized use. 4. Grouper Dairy’s incremental borrowing rate is 8% per year. The implicit rate is also 8%. 5. Grouper Dairy depreciates similar equipment that it owns on a straight-line basis. 6. Collectibility of the payments is probable. Prepare the journal entries for the lessee and lessor at January 1, 2020, and December 31, 2020 (the lessee’s and lessor’s year-end). Assume no reversing entries. (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 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25125 and final answers to 0 decimal places, e.g. 5,250.) Date Account Titles and Explanation Debit Credit Lessee: Jan. 1, 2020 or Dec. 31, 2020 (To record the lease.) Jan. 1, 2020 or Dec. 31, 2020 (To record lease payment.) Lessor: Jan. 1, 2020 or Dec. 31, 2020 (To record the lease.) Jan. 1, 2020 or Dec. 31, 2020 (To record lease payment.) Lessee: Jan. 1, 2020or Dec. 31, 2020 (To record interest.) Jan. 1, 2020 or Dec. 31, 2020 (To record amortization.) Lessor: Jan. 1, 2020Dec. 31, 2020

Grouper Dairy leases its milking equipment from Monty Finance Company under the following lease terms. 1. The lease term is 10 years, noncancelable, and requires equal rental payments of $32,700 due at the beginning of each year starting January 1, 2020. 2. The equipment has a fair value at the commencement of the lease (January 1, 2020) of $246,978 and a cost of $274,000 on Monty Finance’s books. It also has an estimated economic life of 15 years and an expected residual value of $13,800, though Grouper Dairy has guaranteed a residual value of $21,600 to Monty Finance. 3. The lease contains no renewal options, and the equipment reverts to Monty Finance upon termination of the lease. The equipment is not of a specialized use. 4. Grouper Dairy’s incremental borrowing rate is 8% per year. The implicit rate is also 8%. 5. Grouper Dairy depreciates similar equipment that it owns on a straight-line basis. 6. Collectibility of the payments is probable. Prepare the journal entries for the lessee and lessor at January 1, 2020, and December 31, 2020 (the lessee’s and lessor’s year-end). Assume no reversing entries. (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 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25125 and final answers to 0 decimal places, e.g. 5,250.) Date Account Titles and Explanation Debit Credit Lessee: Jan. 1, 2020 or Dec. 31, 2020 (To record the lease.) Jan. 1, 2020 or Dec. 31, 2020 (To record lease payment.) Lessor: Jan. 1, 2020 or Dec. 31, 2020 (To record the lease.) Jan. 1, 2020 or Dec. 31, 2020 (To record lease payment.) Lessee: Jan. 1, 2020or Dec. 31, 2020 (To record interest.) Jan. 1, 2020 or Dec. 31, 2020 (To record amortization.) Lessor: Jan. 1, 2020Dec. 31, 2020

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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Question

Grouper Dairy leases its milking equipment from Monty Finance Company under the following lease terms.

1.		The lease term is 10 years, noncancelable, and requires equal rental payments of $32,700 due at the beginning of each year starting January 1, 2020.
2.		The equipment has a fair value at the commencement of the lease (January 1, 2020) of $246,978 and a cost of $274,000 on Monty Finance’s books. It also has an estimated economic life of 15 years and an expected residual value of $13,800, though Grouper Dairy has guaranteed a residual value of $21,600 to Monty Finance.
3.		The lease contains no renewal options, and the equipment reverts to Monty Finance upon termination of the lease. The equipment is not of a specialized use.
4.		Grouper Dairy’s incremental borrowing rate is 8% per year. The implicit rate is also 8%.
5.		Grouper Dairy depreciates similar equipment that it owns on a straight-line basis.
6.		Collectibility of the payments is probable.

Prepare the journal entries for the lessee and lessor at January 1, 2020, and December 31, 2020 (the lessee’s and lessor’s year-end). Assume no reversing entries. (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 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25125 and final answers to 0 decimal places, e.g. 5,250.)

Date

Account Titles and Explanation

Debit

Credit

Lessee:

Jan. 1, 2020 or Dec. 31, 2020

(To record the lease.)

Jan. 1, 2020 or Dec. 31, 2020

(To record lease payment.)

Lessor:

Jan. 1, 2020 or Dec. 31, 2020

(To record the lease.)

Jan. 1, 2020 or Dec. 31, 2020

(To record lease payment.)

Lessee:

Jan. 1, 2020or Dec. 31, 2020

(To record interest.)

Jan. 1, 2020 or Dec. 31, 2020

(To record amortization.)

Lessor:

Jan. 1, 2020Dec. 31, 2020

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