Macinski Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of $70,000 and fair value of $95,000. Under the 3-year, non-cancelable contract, Sharrer will receive title to the machine at the end of the lease. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2020. Macinski expects to earn an 8% return on its investment, and this implicit rate is known by Sharrer. The annual rentals are payable on each December 31, beginning December 31, 2020. Prepare the journal entry at commencement of the lease for Sharrer, assuming (1) Sharrer does not know Macinski's implicit rate(Sharrer's incremental borrowing rate is 9%), and (2) Sharrer incurs initial directs costs of $10,000. (Credit account titles areautomatically indented when amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in thefactor table provided and round final answers to 0 decimal places e.g. 5,275.)DateAccount Titles and ExplanationDebitCredit1/1/20Right-of-Use AssetLease LiabilityCash10000

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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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Macinski Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of $70,000 and fair value of $95,000. Under the 3-year, non-cancelable contract, Sharrer will receive title to the machine at the end of the lease. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2020. Macinski expects to earn an 8% return on its investment, and this implicit rate is known by Sharrer. The annual rentals are payable on each December 31, beginning December 31, 2020.

Prepare the journal entry at commencement of the lease for Sharrer, assuming (1) Sharrer does not know Macinski's implicit rate
(Sharrer's incremental borrowing rate is 9%), and (2) Sharrer incurs initial directs costs of $10,000. (Credit account titles are
automatically indented when amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the
factor table provided and round final answers to 0 decimal places e.g. 5,275.)
Date
Account Titles and Explanation
Debit
Credit
1/1/20
Right-of-Use Asset
Lease Liability
Cash
10000

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