On January 1, 2021, The Madrid Telephone Co. leased diagnostic equipment from Carlota Corp. The lease agreement specifies eight annual payments of $85,000 beginning January 1, 2021, the beginning of the lease, and at each December 31 thereafter through 2027. The eight-year lease term ending December 31, 2028 (a year after the final payment), is equal to the estimated useful life of the equipment. The contract specifies that lease payments for each year will increase on the basis of the increase in the Consumer Price Index (CPI) for the year just ended. Thus, the first payment will be $85,000, and the second and subsequent payments might be different. The CPI at the beginning of the lease is 110. Carlota Corp. routinely acquires diagnostic equipment for lease to other firms. The interest rate in these financing arrangements is 5%. Required: 1. Prepare the appropriate journal entries for The Madrid Telephone Co. to record the lease at its beginning. 2. Assuming the CPI is 113 at that time, prepare the appropriate journal entries related to the lease for The Madrid Telephone Co. at December 31, 2021.

On January 1, 2021, The Madrid Telephone Co. leased diagnostic equipment from Carlota Corp. The lease agreement specifies eight annual payments of $85,000 beginning January 1, 2021, the beginning of the lease, and at each December 31 thereafter through 2027. The eight-year lease term ending December 31, 2028 (a year after the final payment), is equal to the estimated useful life of the equipment. The contract specifies that lease payments for each year will increase on the basis of the increase in the Consumer Price Index (CPI) for the year just ended. Thus, the first payment will be $85,000, and the second and subsequent payments might be different. The CPI at the beginning of the lease is 110. Carlota Corp. routinely acquires diagnostic equipment for lease to other firms. The interest rate in these financing arrangements is 5%. Required: 1. Prepare the appropriate journal entries for The Madrid Telephone Co. to record the lease at its beginning. 2. Assuming the CPI is 113 at that time, prepare the appropriate journal entries related to the lease for The Madrid Telephone Co. at December 31, 2021.

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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