QUESTION 2On January 1, 2008, Grate Company (as lessor) entered into a non-cancelablec lease agreementwith Barrell Company for machinery which was carried on the accounting records of Grate at$4,530,000 and had a market value of $5,000,000. Minimum lease payments under the leaseagreement which expires on December 31, 2017, total $7,100,000. Payments of $710,000 aredue each January 1. The first payment was made on January 1, 2008 when the lease agreementwas finalized. The interest rate of 10% which was stipulated in the lease agreement is theimplicit rate set by the lessor, the incremental borrowing rate of the lessee is 9%. The effectiveinterest method of amortization is being used. Barrell expects the machine to have a ten-year lifewith no salvage value, and be depreciated on a straight-line basis. Collectibility of the rentals isreasonably predictable, and there are no important uncertainties surrounding the costs yet to beincurred by the lessor. The implicit rate of the lessor is known by the lessee.Required:(a)From the lessee's viewpoint, what kind of lease is the above agreement? From the lessor'sviewpoint, what kind of lease is the above agreement?(b) What joumal entries should be recorded by Barrell Company on January 1, 2008, 31December 2008 and 31 December 2009?(c) What jourmal entries should be recorded by Grate Company on January 1, 2008, 31December 2008 and 31 December 2009?

In the given question, Grate Company gives Barrell Company a machinery at $4,530,000 with the market…

nuary 1, 2008, Grate Company (as lessc Barrell Company for machinery which v- 0,000 and had a market value of $5,00 ment which expires on December 31, 20 ach January 1. The first payment was m. inalized. The interest rate of 10% whi-

nuary 1, 2008, Grate Company (as lessc Barrell Company for machinery which v- 0,000 and had a market value of $5,00 ment which expires on December 31, 20 ach January 1. The first payment was m. inalized. The interest rate of 10% whi-

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

Mortgages

A mortgage is a formal agreement in which a bank or other financial institution lends cash at interest in return for assuming the title to the debtor's property, on the condition that the obligation is paid in full.

Mortgage

The term "mortgage" is a type of loan that a borrower takes to maintain his house or any form of assets and he agrees to return the amount in a particular period of time to the lender usually in a series of regular equally monthly, quarterly, or half-yearly payments.

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