On January 1, 2020, Ivanhoe 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 $7,000. 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 $120,000. 4. The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight-line basis. 5. Ivanhoe 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. Both the lessor and the lessee’s accounting periods end on December 31. Click here to view factor tables. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) (a) Correct answer icon Your answer is correct. Discuss the nature of this lease to Ivanhoe and Flynn. The nature of this lease for Ivanhoe is a lease. The nature of this lease for Flynn is a lease. eTextbook and Media List of Accounts Attempts: 1 of 5 used (b) Calculate the amount of the annual rental payment. (Round answer to 0 decimal places, e.g. 5,275.) Annual rental payment $ eTextbook and Media List of Accounts Save for Later Attempts: 0 of 5 used Submit Answer (c) Prepare all the necessary journal entries for Ivanhoe for 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275. Record journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit

On January 1, 2020, Ivanhoe 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 $7,000. 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 $120,000. 4. The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight-line basis. 5. Ivanhoe 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. Both the lessor and the lessee’s accounting periods end on December 31. Click here to view factor tables. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) (a) Correct answer icon Your answer is correct. Discuss the nature of this lease to Ivanhoe and Flynn. The nature of this lease for Ivanhoe is a lease. The nature of this lease for Flynn is a lease. eTextbook and Media List of Accounts Attempts: 1 of 5 used (b) Calculate the amount of the annual rental payment. (Round answer to 0 decimal places, e.g. 5,275.) Annual rental payment $ eTextbook and Media List of Accounts Save for Later Attempts: 0 of 5 used Submit Answer (c) Prepare all the necessary journal entries for Ivanhoe for 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275. Record journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit

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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(a)

Correct answer icon

Your answer is correct.

Discuss the nature of this lease to Ivanhoe and Flynn.

The nature of this lease for Ivanhoe is a lease.

The nature of this lease for Flynn is a lease.

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(b)

Calculate the amount of the annual rental payment. (Round answer to 0 decimal places, e.g. 5,275.)

Annual rental payment

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(c)

Prepare all the necessary journal entries for Ivanhoe for 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275. Record journal entries in the order presented in the problem.)

Date

Account Titles and Explanation

Debit

Credit

(To record the lease)

(To record lease payment)

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(d)

Suppose the collectibility of the lease payments was not probable for Ivanhoe. Prepare the necessary journal entry for the company in 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Date	Account Titles and Explanation	Debit	Credit
1/1/20

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(e)

Prepare all the necessary journal entries for Flynn for 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275. Record journal entries in the order presented in the problem.)

Date	Account Titles and Explanation	Debit	Credit


	(To record the lease)


	(To record the lease payment)


	(To record amortization of the right-of-use asset)


	(To record interest expense)

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(f)

Prepare the effect on the journal entry for Flynn at lease commencement, assuming initial direct costs of $2,000 are incurred by Flynn to negotiate the lease. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Account Titles and Explanation	Debit	Credit

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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 $7,000.
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 $120,000.
4.		The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight-line basis.
5.		Ivanhoe 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.