Indigo Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2020. Annual rental payments of $45,000 are to be made at the beginning of each lease year (December 31). The interest rate used by the lessor in setting the payment schedule is 7%; Indigo's incremental borrowing rate is 9%. Indigo is unaware of the rate being used by the lessor. At the end of the lease, Indigo has the option to buy the equipment for $5,000, considerably below its estimated fair value at that time. The equipment has an estimated useful life of 7 years, with no salvage value. Indigo uses the straight-line method of depreciation on similar owned equipment. Click here to view factor tables.
Indigo Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2020. Annual rental payments of $45,000 are to be made at the beginning of each lease year (December 31). The interest rate used by the lessor in setting the payment schedule is 7%; Indigo's incremental borrowing rate is 9%. Indigo is unaware of the rate being used by the lessor. At the end of the lease, Indigo has the option to buy the equipment for $5,000, considerably below its estimated fair value at that time. The equipment has an estimated useful life of 7 years, with no salvage value. Indigo uses the straight-line method of depreciation on similar owned equipment. Click here to view factor tables.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Subject: acounting
Transcribed Image Text:Prepare the journal entries, that Indigo should record on December 31, 2020. (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 O for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final
answers to 0 decimal places, e.g. 58,971.)
Date
December
31, 2020
Account Titles and Explanation
(To record leased asset and related liability.)
Debit
Credit
IL
Transcribed Image Text:Indigo Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2020. Annual rental
payments of $45,000 are to be made at the beginning of each lease year (December 31). The interest rate used by the lessor in setting
the payment schedule is 7%; Indigo's incremental borrowing rate is 9%. Indigo is unaware of the rate being used by the lessor. At the
end of the lease, Indigo has the option to buy the equipment for $5,000, considerably below its estimated fair value at that time. The
equipment has an estimated useful life of 7 years, with no salvage value. Indigo uses the straight-line method of depreciation on
similar owned equipment.
Click here to view factor tables.
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