Python Company leased equipment from Hope Leasing on January 1, 2006. Calculate the carrying value of the lease payable and give journal entires.
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Python Company leased equipment from Hope Leasing on January 1, 2006. Hope
purchased the equipment at a cost of $222,666.
Other information:
Lease term 3 years
Annual payments $80,000 on January 1 each year starting in 2006
Life of asset 3 years
Fair value of asset $222,666
Implicit interest rate 8%
Incremental rate 8%
There is no expected residual value.
Required:
Prepare appropriate journal entries for Python for 2006 and 2007. Assume straight-line depreciation and a December 31 year-end.
Also, calculate the carrying value of the lease payable at December 31, 2007.
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First of all, we compute the The Present Value Amount of an annuity due of 1 for 3 periods (years) at 8% (r = .08) = (1 - 1/(1+r)^3)*(1+r)/r = 2.783.
Compute the present value of the minimum lease payments, using the lessee's incremental borrowing rate, unless:
? The lessor's implicit rate is lower, and
? The lessee has knowledge of the lower rate.
It is the same in our case (8%). So we have:
$80,000 x 2.783 (PV of an annuity due for 3 periods at 8%) = $222,640
Now we need to record the leased asset at the lesser of the assets fair market value at the ...
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