On January 1, 20X1, Bare Trees Company signed a three-year

On January 1, 20X1, Bare Trees Company signed a three-year noncancelable lease with Dreams Inc. The lease calls for three payments of $62,258.09 to be made at each year end. The lease payments include $3,000 of executory costs related to service. The lease is nonrenewable and has no bargain purchase option. Ownership of the leased asset reverts to Dreams at the end of the lease period, at which time Bare Trees has guaranteed that the leased asset will be worth at least $15,000. The leased asset has an expected useful life of four years, and Bare Trees uses straight-line depreciation for financial reporting purposes. Bare Trees’s incremental borrowing rate is 9%.


Required:

1. Prepare Bare Trees Company’s amortization schedule for the lease liability. Round the amount of the initial lease liability at January 1, 20X1, to the nearest dollar. Round all amounts in the amortization table to the nearest cent.

2. Prepare Bare Trees Company’s journal entries to record (a) the lease on January 1, 20X1; (b) the lease payments on December 31, 20X1 and 20X2; and (c) the right-of-use asset amortization in 20X1 and 20X2.

3. Assume that at the end of the lease term, the leased asset will be worth $16,000. Make Bare Trees Company’s journal entry to account for the residual value guarantee.

4. Repeat requirement 3, but assume that the leased asset will be worth only $12,000 at the end of the lease term.

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