Leasing Company agrees to lease equipment to Cheyenne Corporation on January 1, 2020. The following information relates
Question:
Leasing Company agrees to lease equipment to Cheyenne Corporation on January 1, 2020. The following information relates to the lease agreement.
1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
2. The cost of the machinery is $575,000, and the fair value of the asset on January 1, 2020, is $755,000.
3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $50,000. Cheyenne estimates that the expected residual value at the end of the lease term will be 50,000. Cheyenne amortizes all of its leased equipment on a straight-line basis.
4. The lease agreement requires equal annual rental payments, beginning on January 1, 2020.
5. The collectibility of the lease payments is probable.
6. Crane desires a 9% rate of return on its investments. Cheyenne’s incremental borrowing rate is 10%, and the lessor’s implicit rate is unknown.
**Given: Annual rental payment is $132,639 & Present value of minimum lease payments is $710,316
1) Prepare the journal entries Crane* would make in 2020 and 2021 related to the lease arrangement Round answers to 0 decimal places e.g. 58,972
2) Suppose Cheyenne expects the residual value at the end of the lease term to be $40,000 but still guarantees a residual of $50,000.
Compute the value of the lease liability at lease commencement.
