On January 1, 2022, Durant Corporation agrees to lease equipment to Irving Corporation. The term of the lease is 5 years, and the equipment has an estimated economic life of 7 years. Durant's cost of the machinery is $475,000 and the machinery's fair value is $600,000. The lease has no renewal or purchase options, and requires 5 annual rental payments, beginning January 1, 2022. The machinery is not of a specialized nature, and reverts back to Durant at the end of the lease. Durant expects the asset to have a residual value of $55,000 at the end of the lease. The residual value is not guaranteed. Durant's implicit rate (known to Irving) is 10%. Irving's incremental borrowing rate is 5%. Collectibility of the lease payments is probable. Required a. Calculate the amount of the annual rental payment required. b. What type of lease is this to Irving? To Durant? Explain and show calculations. c. Compute the value of the lease liability and prepare all of Irving's required journal entries for 2022.
On January 1, 2022, Durant Corporation agrees to lease equipment to Irving Corporation. The term of the lease is 5 years, and the equipment has an estimated economic life of 7 years. Durant's cost of the machinery is $475,000 and the machinery's fair value is $600,000. The lease has no renewal or purchase options, and requires 5 annual rental payments, beginning January 1, 2022. The machinery is not of a specialized nature, and reverts back to Durant at the end of the lease. Durant expects the asset to have a residual value of $55,000 at the end of the lease. The residual value is not guaranteed. Durant's implicit rate (known to Irving) is 10%. Irving's incremental borrowing rate is 5%. Collectibility of the lease payments is probable. Required a. Calculate the amount of the annual rental payment required. b. What type of lease is this to Irving? To Durant? Explain and show calculations. c. Compute the value of the lease liability and prepare all of Irving's required journal entries for 2022.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:On January 1, 2022, Durant Corporation agrees to lease equipment to
Irving Corporation. The term of the lease is 5 years, and the equipment has
an estimated economic life of 7 years. Durant's cost of the machinery is
$475,000 and the machinery's fair value is $600,000. The lease has no
renewal or purchase options, and requires 5 annual rental payments,
beginning January 1, 2022. The machinery is not of a specialized nature,
and reverts back to Durant at the end of the lease.
Durant expects the asset to have a residual value of $55,000 at the end of
the lease. The residual value is not guaranteed. Durant's implicit rate
(known to Irving) is 10%. Irving's incremental borrowing rate is 5%.
Collectibility of the lease payments is probable.
Required
a. Calculate the amount of the annual rental payment required.
b. What type of lease is this to Irving? To Durant? Explain and show
calculations.
c. Compute the value of the lease liability and prepare all of Irving's required
journal entries for 2022.
d. Prepare all of Durant's required journal entries for 2022.
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