On January 1, 2020, Dulcinea Company enters a ten-year noncancelable lease for equipment having an estimated useful life of 10 years and a fair value to the lessor, Mojito Corp., at the inception of the lease of $6,000,000. Dulcinea's incremental borrowing rate is 4%. Dulcinea uses the straight-line method to depreciate its assets. The lease contains the following provisions: (Assume the cost to the lessor was $4,000,000.) 1. Rental payments of $687,268, payable at the beginning of each year. 2. There is a guaranteed residual value of $300,000. The expected residual value is $250,000. Required: a. What kind of lease is this to the two companies and why? b. Prepare the journal entries for both companies during the first year of the lease.
On January 1, 2020, Dulcinea Company enters a ten-year noncancelable lease for equipment having an estimated useful life of 10 years and a fair value to the lessor, Mojito Corp., at the inception of the lease of $6,000,000. Dulcinea's incremental borrowing rate is 4%. Dulcinea uses the straight-line method to depreciate its assets. The lease contains the following provisions: (Assume the cost to the lessor was $4,000,000.) 1. Rental payments of $687,268, payable at the beginning of each year. 2. There is a guaranteed residual value of $300,000. The expected residual value is $250,000. Required: a. What kind of lease is this to the two companies and why? b. Prepare the journal entries for both companies during the first year of the lease.
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Chapter20: Accounting For Leases
Section: Chapter Questions
Problem 6P: Sales-Type Lease with Unguaranteed Residual Value Lessor Company and Lessee Company enter into a...
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![On January 1, 2020, Dulcinea Company enters a ten-year noncancelable lease for equipment
having an estimated useful life of 10 years and a fair value to the lessor, Mojito Corp., at the
inception of the lease of $6,000,000. Dulcinea's incremental borrowing rate is 4%. Dulcinea
uses the straight-line method to depreciate its assets. The lease contains the following
provisions: (Assume the cost to the lessor was $4,000,000.)
1. Rental payments of $687,268, payable at the beginning of each year.
2. There is a guaranteed residual value of $300,000. The expected residual value is
$250,000.
Required:
a. What kind of lease is this to the two companies and why?
b. Prepare the journal entries for both companies during the first year of the lease.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fc0cd64b3-d22c-4f80-aac4-ddd0e7174ead%2Fdaa524a9-3c0a-44b2-864e-70a97b47ef09%2Fwq8wu0a_processed.png&w=3840&q=75)
Transcribed Image Text:On January 1, 2020, Dulcinea Company enters a ten-year noncancelable lease for equipment
having an estimated useful life of 10 years and a fair value to the lessor, Mojito Corp., at the
inception of the lease of $6,000,000. Dulcinea's incremental borrowing rate is 4%. Dulcinea
uses the straight-line method to depreciate its assets. The lease contains the following
provisions: (Assume the cost to the lessor was $4,000,000.)
1. Rental payments of $687,268, payable at the beginning of each year.
2. There is a guaranteed residual value of $300,000. The expected residual value is
$250,000.
Required:
a. What kind of lease is this to the two companies and why?
b. Prepare the journal entries for both companies during the first year of the lease.
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