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Please write steps. thank you Flounder Corporation leased equipment to Shamrock, Inc. on January 1, 2020....

Please write steps. thank you

Flounder Corporation leased equipment to Shamrock, Inc. on January 1, 2020. The lease agreement called for annual rental payments of $1,276 at the beginning of each year of the 3-year lease. The equipment has an economic useful life of 7 years, a fair value of $7,600, a book value of $5,600, and Flounder expects a residual value of $5,100 at the end of the lease term. Flounder set the lease payments with the intent of earning a 8% return, though Shamrock is unaware of the rate implicit in the lease and has an incremental borrowing rate of 10%. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature.

What is the amount of the rental payments used in the lease agreement?

Prepare the entries for Flounder for 2020.

How would Flounder’s accounting in part a change if it incurred legal fees of $900 to execute the lease documents and $600 in advertising expenses for the year in connection with the lease?

Solutions

Expert Solution

Part A

Fair value of leased asset to lessor

7600

Less: Present value of unguaranteed residual value (5100*0.79383)

4049

Amount to be recovered through lease payments

3551

Periodic lease payments (3551/2.78326)

$1276

present value of 1 at 8% for 3 periods = 0.79383

Present value of annuity due of 1 for 3 periods at 8% = 2.78326

Part B

Date

General journal

Debit

Credit

January 1, 2020

Cash

1276

Unearned Lease Revenue

1276

December 31, 2020

Unearned Lease Revenue

1276

Lease Revenue

1276

(to record the recognition of the revenue)

December 31, 2020

Depreciation Expense (5600/7)

800

Accumulated depreciation – equipment

800

Part C

Date

General journal

Debit

Credit

January 1, 2020

Prepaid Legal Fees

900

Cash

900

January 1, 2020

Advertising Expense

600

Cash

600

(to record the recognition of the revenue)

December 31, 2020

Legal Expense (900/3)

300

Prepaid Legal Fees

300

ekkarill92 answered 2 weeks ago
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