Evaluate the situation below, and determine the journal entries that need to be booked as a result.
Question:
Evaluate the situation below, and determine the journal entries that need to be booked as a result.
Incremental borrowing rate. 5.0%
Number of common shares authorized. 590,000
Number of common shares issued and outstanding as of the end of last year. 59,000
Par value of common stock. $0.05
Tax rate. 20%
Question 1.
At the start of the year, your company entered a 10-year lease for a warehouse. Rental payments of $70,000 are due at the start of the lease and December 31 of every year thereafter until a total of 10 payments have been made. The fair value of the warehouse at the start of the lease is $569,389. The warehouse is expected to have an economic life of 12 years and a residual value of $5,000. Your rental agreement guarantees a residual value of $8,000.
Your company uses straight-line depreciation for all tangible assets. There are no renewal or purchase options in the lease, and the warehouse will still belong to the original owner at the end of the lease period. You do not know the lessor's implicit rate. The company did not make any entries related to the lease except for the payments, which were improperly debited to prepaid lease expense.
Explain reasons for methods used and how calculations were made.
