Sosa Co. leased equipment from Extra Finance Inc. on January 1, 20X1. The lease calls for five annual payments of $700,000. The equipment will be returned to Extra at the end of the lease term. The payments are due on January 1 of each year beginning on January 1, 20X1. Sosa's incremental borrowing rate is 11%. The interest rate implicit in the lease payments is 10% and is known to Sosa. The present value of lease payments at the inception of the lease and before the first annual payment is $2,918,902. The lease is appropriately accounted for as a finance lease by Sosa. Sosa uses the straight-line method of depreciation for all plant assets. Sosa's adjusting journal entries at December 31, 20X2 for the leased asset and lease liability will include O a credit to Lease Liability for $700,000. O a debit to Depreciation Expense for $583,780. O a debit to Lease Liability for $221,890. O a debit to Interest Expense for $221,890.
Sosa Co. leased equipment from Extra Finance Inc. on January 1, 20X1. The lease calls for five annual payments of $700,000. The equipment will be returned to Extra at the end of the lease term. The payments are due on January 1 of each year beginning on January 1, 20X1. Sosa's incremental borrowing rate is 11%. The interest rate implicit in the lease payments is 10% and is known to Sosa. The present value of lease payments at the inception of the lease and before the first annual payment is $2,918,902. The lease is appropriately accounted for as a finance lease by Sosa. Sosa uses the straight-line method of depreciation for all plant assets. Sosa's adjusting journal entries at December 31, 20X2 for the leased asset and lease liability will include O a credit to Lease Liability for $700,000. O a debit to Depreciation Expense for $583,780. O a debit to Lease Liability for $221,890. O a debit to Interest Expense for $221,890.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Sosa Co. leased equipment from Extra Finance Inc. on January 1, 20X1. The lease calls for five annual payments of $700,000. The
equipment will be returned to Extra at the end of the lease term. The payments are due on January 1 of each year beginning on
January 1, 20X1. Sosa's incremental borrowing rate is 11%. The interest rate implicit in the lease payments is 10% and is known to
Sosa. The present value of lease payments at the inception of the lease and before the first annual payment is $2,918,902. The lease is
appropriately accounted for as a finance lease by Sosa. Sosa uses the straight-line method of depreciation for all plant assets.
Sosa's adjusting journal entries at December 31, 20X2 for the leased asset and lease liability will include
O a credit to Lease Liability for $700,000.
O a debit to Depreciation Expense for $583,780.
O a debit to Lease Liability for $221,890.
O a debit to Interest Expense for $221,890.
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