Hornstein Finance Co. (lessor) leased an asset on January 1, 2019, to HPQ Fishing (lessee). The lease agreement calls for eight annual lease payments of $60,000 beginning on the commencement date. The interest rate implicit in the lease is 7%; however, HPQ cannot readily determine this. HPQ's incremental borrowing rate is 6%. The asset has an estimated value of $30,000 at the end of the lease; however, this is not guaranteed. HPQ must return the asset to the lessor at the end of the lease. The leased equipment has an estimated useful life of 10 years and no residual value at that time. HPQ paid its lawyers $4,000 to review the lease agreement. HPQ uses the straight-line method to depreciate similar equipment that it owns and has a December 31 year end.

Hornstein Finance Co. (lessor) leased an asset on January 1, 2019, to HPQ Fishing (lessee). The lease agreement calls for eight annual lease payments of $60,000 beginning on the commencement date. The interest rate implicit in the lease is 7%; however, HPQ cannot readily determine this. HPQ's incremental borrowing rate is 6%. The asset has an estimated value of $30,000 at the end of the lease; however, this is not guaranteed. HPQ must return the asset to the lessor at the end of the lease. The leased equipment has an estimated useful life of 10 years and no residual value at that time. HPQ paid its lawyers $4,000 to review the lease agreement. HPQ uses the straight-line method to depreciate similar equipment that it owns and has a December 31 year end.

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

Hornstein Finance Co. (lessor) leased an asset on January 1, 2019, to HPQ Fishing (lessee). The lease
agreement calls for eight annual lease payments of $60,000 beginning on the commencement date. The
interest rate implicit in the lease is 7%; however, HPQ cannot readily determine this. HPQ's incremental
borrowing rate is 6%. The asset has an estimated value of $30,000 at the end of the lease; however, this is not
guaranteed. HPQ must return the asset to the lessor at the end of the lease. The leased equipment has an
estimated useful life of 10 years and no residual value at that time. HPQ paid its lawyers $4,000 to review the
lease agreement. HPQ uses the straight-line method to depreciate similar equipment that it owns and has a
December 31 year end.
Prepare HPQ Fishing's journal entries for January 1, 2020. Enter a debit as positive, a credit as negative. For
any accounts that are not applicable, enter a 0.

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