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.

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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