On January 1, 2020, Crane Company leased equipment to Flynn Corporation. The following information pertains to this lease: 1. The term of the non-cancelable lease is 6 years. At the end of the lease term, Flynn has the option to purchase the equipment for $1,000, while the expected residual value at the end of the lease is $9,000. 2. Equal rental payments are due on January 1 of each year, beginning in 2020. 3. The fair value of the equipment on January 1, 2020, is $160,000, and its cost is $140,000. 4. The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight-line basis. 5. Crane set the annual rental to ensure a 6% rate of return. Flynn’s incremental borrowing rate is 8%, and the implicit rate of the lessor is unknown. 6. Collectibility of lease payments by the lessor is probable Prepare all the necessary journal entries for Flynn to record the lease on 1/1/ 2020, to record the lease payment on 1/1/2020, to record amortization of the right-of -use asset on the 12/31/2020 and to record interest expense on the 12/31/2020. Prepare the effect on the journal entry for Flynn at lease commencement, assuming initial direct costs of $2000 are incurred by Flynn to negotiate the lease.

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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On January 1, 2020, Crane Company leased equipment to Flynn Corporation. The following information pertains to this lease:

1. The term of the non-cancelable lease is 6 years. At the end of the lease term, Flynn has the option to purchase the equipment for $1,000, while the expected residual value at the end of the lease is $9,000.

2. Equal rental payments are due on January 1 of each year, beginning in 2020.

3. The fair value of the equipment on January 1, 2020, is $160,000, and its cost is $140,000.

4. The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight-line basis.

5. Crane set the annual rental to ensure a 6% rate of return. Flynn’s incremental borrowing rate is 8%, and the implicit rate of the lessor is unknown.

6. Collectibility of lease payments by the lessor is probable

Prepare all the necessary journal entries for Flynn to record the lease on 1/1/ 2020, to record the lease payment on 1/1/2020, to record amortization of the right-of -use asset on the 12/31/2020 and to record interest expense on the 12/31/2020.
Prepare the effect on the journal entry for Flynn at lease commencement, assuming initial direct costs of $2000 are incurred by Flynn to negotiate the lease.

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