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Lessee Entries with Residual Value

The following facts pertain to a non-cancelable lease agreement between Voris Leasing Company and Zarle Company, a lessee.

Inception date January 1, 2007
Annual lease payment due at the beginning of
Each year, beginning with January 1, 2007 81,365
Residual value of equipment at end of lease term,
Guaranteed by the lessee 50,000
Lease term 6 year
Economic life of leased equipment 6 year
Fair value of asset at January 1, 2007 $400,000
Lessor's implicit rate 12%
Lessee's incremental borrowing rate 12%

The lessee assumes responsibility for all executory costs, which are expected to $4,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $50,000. The lessee uses the straight line depreciation method for all equipment.


(Round all numbers to the nearest cent.)

(a) Prepare an amortization schedule that would be suitable for the lessee for the lease term.
(b) Prepare all of the journal entries for the lessee for 2007 and 2008 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee's annual accounting period ends on December 31 and reversing entries are used when appropriate.

Solution Summary

This Solution contains the relevant journal entries for the given situation.