Garvey Company (the lessee) entered into an equipment lease with Richie Company (the lessor) on January 1 of Year 1.1.The equipment reverts back to the lessor at the end of the lease, and there is no bargain purchase option. The equipment is not specialized for Garvey.2.The lease term is 5 years and requires Garvey to make annual payments of $65,949.37 at the end of each year.3.The discount rate is 10%, which is implicit in the lease. Garvey knows this rate.4.The fair value of the equipment at the lease inception is $250,000. The present value of an ordinary annuity of five payments of $65,949.37 each at 10% is $250,000.5.The equipment has an estimated economic life of 7 years and has zero residual value at the end of this time. Straight-line depreciation is used for similar assets. Required: Prepare the journal entries that Garvey Company would make in the first year of the lease assuming the lease is classified as a finance lease. However, assume that Garvey is now required to make the $65,949.37 payments on January 1 each year and that the fair value at the lease inception is now $275,000 ($65,949:37 x 4:169865). Prepare the journal entries that Garvey Company would make in the first year of the lease assuming the lease is classified as a finance lease. However, assume that Garvey is now required to make the $65,949.37 payments on January 1 each year and that the fair value at the lease inception is now $275,000 ($65,949:37 x 4:169865).

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Answered: Prepare the journal entries that Garvey…

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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Garvey Company (the lessee) entered into an equipment lease with Richie Company (the lessor) on January 1 of Year 1.

1.	The equipment reverts back to the lessor at the end of the lease, and there is no bargain purchase option. The equipment is not specialized for Garvey.
2.	The lease term is 5 years and requires Garvey to make annual payments of $65,949.37 at the end of each year.
3.	The discount rate is 10%, which is implicit in the lease. Garvey knows this rate.
4.	The fair value of the equipment at the lease inception is $250,000. The present value of an ordinary annuity of five payments of $65,949.37 each at 10% is $250,000.
5.	The equipment has an estimated economic life of 7 years and has zero residual value at the end of this time. Straight-line depreciation is used for similar assets.

Required:

Prepare the journal entries that Garvey Company would make in the first year of the lease assuming the lease is classified as a finance lease. However, assume that Garvey is now required to make the $65,949.37 payments on January 1 each year and that the fair value at the lease inception is now $275,000 ($65,949:37 x 4:169865).

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