Rogue Company leases a card-making machine to Gambit Inc. on January 1, 2017. The following information details
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Question:
Rogue Company leases a card-making machine to Gambit Inc. on January 1, 2017. The following information details the lease contract:
- The lease term is ten years with no renewal or purchase options.
- The machinery cost Rogue $300,000 to construct and has a fair value of $495,678 at the lease inception. Rogue also incurred $14,000 in legal fees directly related to the signing of the lease.
- The asset reverts to Rogue at the end of the lease. Rogue estimates the residual value of the asset to be $15,000.
- Gambit has guaranteed the residual value of the asset will be $10,000. Due to hard expected usage of the asset, Gambit anticipates the actual residual value to only be $4,000 at the end of the lease.
- The assets estimated economic life is twelve years with a salvage value of $1,000.
- The lease calls for equal payments to be made at the beginning of each year starting January 1, 2017.
- Both firms have December 31 fiscal year ends and use straight-line depreciation.
- Rogue has priced a 5% implicit rate into the lease. Gambit’s incremental borrowing rate is 7% and it does not know the implicit rate of the lease.
- Gambit incurred $7,000 in document preparations costs to execute the lease.
- Collectability of lease payments is probable.
Required:
- Calculate the annual payments Rogue will require for the lease.
- What type of lease is this for both Rogue and Gambit?
- Prepare the lessor’s (Rogue’s) amortization table and show all the journal entries Rogue will make for the lease in 2017 and 2018.
Related Book For
Intermediate Accounting
ISBN: 978-0132162302
1st edition
Authors: Elizabeth A. Gordon, Jana S. Raedy, Alexander J. Sannella
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