Baker Company (lessee) signed a 7-year lease agreement for equipment on January 1, 2020. Annual rental payments of $96,000 are to be made at the beginning of each year (January 1).  An additional $1,000 is paid for taxes, insurance, and maintenance (total payment = $97,000).  Baker's incremental rate is 5%. At the end of the lease, Baker has the option to buy the equipment for $750, well below its then estimated fair value. The equipment has an estimated useful life of 10 years, with no salvage value.  Baker depreciates similar equipment using straight-line. The lessor, Custom, Inc., has an implicit interest rate of 4%, which is not known to Baker.  Lessor Custom’s cost for the equipment is $500,000, with a fair value of $599,815.

Required:  Factor for an annuity due = (1 + i) x (ordinary annuity factor)

a & b) Prepare the journal entry (or entries) that should be recorded on January 1, 2020, by lessee Baker and the lessor, Custom.

Lesse Baker inception entries:

Accounts	Debits	Credits

b)   Lessor Custom’s inception entries:

c)  Prepare the separate journal entries lessee Baker records at year-end (12/31/2020)to recognize interest and depreciation for the equipment.

Accounts	Debits	Credits

d)   Please provide the amounts/accounts disclosed on Baker's December 31, 2020, balance sheet relative to the leased equipment?

Account	Amount

e)  Provide the entry for interest income lessor Custom records at year end 2020 (show your work)?

Answer rating: 100% (QA)

AB Journal Entery by Lessee Baker company on 01st January 2020 Journal By lessee Date Particulars Debit Credit 01Jan20 Right of Use 5838261 Lease Liab... View the full answer