Chapter 15, Problem 15.27E

Lessee; lessee guaranteed residual value

• LO15–2, LO15–6

On January 1, 2018, Maywood Hydraulics leased drilling equipment from Aqua Leasing for a four-year period ending December 31, 2021, at which time possession of the leased asset will revert back to Aqua. The equipment cost Aqua $412,184 and has an expected economic life of five years. Aqua expects the residual value at December 31, 2021, to be $50,000. Negotiations led to Maywood guaranteeing a $70,000 residual value.

Equal payments under the lease are $100,000 and are due on December 31 of each year with the first payment being made on December 31, 2018. Maywood is aware that Aqua used a 5% interest rate when calculating lease payments.

Required:

1. 1. Prepare the appropriate entry for Maywood on January 1, 2018, to record the lease.
2. 2. Prepare all appropriate entries for Maywood on December 31, 2018, related to the lease.