Zebra Company as lessor enters into a lease agreement with United Company, on July 1, 2022, to
Question:
Zebra Company as lessor enters into a lease agreement with United Company, on July 1, 2022, to give the right of use of its equipment to United. The following data are relevant to the lease agreement: 1. The term of the noncancelable lease is 4 years. Annual payments are due on July 1 of each year. There is an guaranteed residual value of $500,000 at the end of the least term. United Company estimates the residual value of the equipment at the end of the lease to be $200,000. 2. The fair value of the equipment on July 1, 2022 is $3,500,000 and cost to Zebra Company is 2,500,000. The equipment has an economic life of 5 years with no salvage value. 3. United depreciates similar machinery it owns on the sum-of-the-years-digits basis. 4. The lessee pays all executory costs. 5. Zebra used an implicit rate of 8% in computing the lease payments. The implicit rate isunknown to United and Uniteds incremental borrowing rate is 10% per year. (Present value factor for 4 periods at 8%, 3.57710; at 10%, 3.48685, present value of 1 in 4 year time at 8%, 0.735; at 10%, 0.683).
Prepare the journal entries for the lessee, United Company in 2022. unknown to United and Uniteds incremental borrowing rate is 10% per year. (Present value factor for 4 periods at 8%, 3.57710; at 10%, 3.48685, present value of 1 in 4 year time at 8%, 0.735; at 10%, 0.683).