Pearl Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2025. Annual rental payments of $51,000 are to be made at the beginning of each lease year (December 31). The interest rate used by the lessor in setting the payment schedule is 4%; Pearl's incremental borrowing rate is 6%. Pearl is unaware of the rate being used by the lessor. At the end of the lease, Pearl has the option to buy the equipment for $5,000, considerably below its estimated fair value at that time. The equipment has an estimated useful life of 7 years, with no salvage value. Pearl uses the straight-line method of depreciation on similar owned equipment. Click here to view factor tables. Your answer is partially correct. Prepare the journal entries, that Pearl should record on December 31, 2025. (Credit account titles are automatically indented wher
Pearl Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2025. Annual rental payments of $51,000 are to be made at the beginning of each lease year (December 31). The interest rate used by the lessor in setting the payment schedule is 4%; Pearl's incremental borrowing rate is 6%. Pearl is unaware of the rate being used by the lessor. At the end of the lease, Pearl has the option to buy the equipment for $5,000, considerably below its estimated fair value at that time. The equipment has an estimated useful life of 7 years, with no salvage value. Pearl uses the straight-line method of depreciation on similar owned equipment. Click here to view factor tables. Your answer is partially correct. Prepare the journal entries, that Pearl should record on December 31, 2025. (Credit account titles are automatically indented wher
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Pearl Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2025. Annual rental
payments of $51,000 are to be made at the beginning of each lease year (December 31). The interest rate used by the lessor in setting
the payment schedule is 4%; Pearl's incremental borrowing rate is 6%. Pearl is unaware of the rate being used by the lessor. At the end
of the lease, Pearl has the option to buy the equipment for $5,000, considerably below its estimated fair value at that time. The
equipment has an estimated useful life of 7 years, with no salvage value. Pearl uses the straight-line method of depreciation on similar
owned equipment.
Click here to view factor tables.
Your answer is partially correct.
Prepare the journal entries, that Pearl should record on December 31, 2025. (Credit account titles are automatically indented
when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and
enter O for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answers
to 0 decimal places, e.g. 58,971. List all debit entries before creant entries.)
Date
December
31, 2025
Account Titles and Explanation
Right-of-Use Asset
Lease Liability
(To record leased asset and related liability.)
Debit
Credit
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