Instructions (a) Evaluate the criteria for classification and describe the nature of the lease for both Rauch and Donahue. (b) Prepare the lease amortization schedule(s) for Donahue for all 4 years of the lease. (c) Prepare the journal entries for Donahue for 2020 and 2021.
Instructions (a) Evaluate the criteria for classification and describe the nature of the lease for both Rauch and Donahue. (b) Prepare the lease amortization schedule(s) for Donahue for all 4 years of the lease. (c) Prepare the journal entries for Donahue for 2020 and 2021.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
7
Transcribed Image Text:HA21-3 (Accounting for an Operating Lease)
Rauch Incorporated leases a piece of equipment to Donahue Corporation on January 1, 2020. The lease agreement called
for annual rental payments of $4,892 beginning on January 1, 2020 and then on December 31 from 2020 through the end
of the 4-year lease. The equipment has an economic useful life of 6 years, a fair value of $25,000, a book value of $20,000,
and both parties expect a residual value of $8,250 at the end of the lease term, though this amount is not guaranteed.
Rauch set the lease payments with the intent of earning a 5% return, and Donahue is aware of this rate. There is no
bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a
specialized nature.
Instructions
(a) Evaluate the criteria for classification and describe the nature of the lease for both Rauch and Donahue.
(b) Prepare the lease amortization schedule(s) for Donahue for all 4 years of the lease.
(c) Prepare the journal entries for Donahue for 2020 and 2021.
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