Question

On January 1, 2020, Sunland Company leased equipment to Flynn Corporation. The following information pertains to this lease. 1. The term of the non-cancelable lease is 6 years. At the end of the lease term, Flynn has the option to purchase the equipment for $2,000, while the expected residual value at the end of the lease is $6,000. 2. Equal rental payments are due on January 1 of each year, beginning in 2020. 3. The fair value of the equipment on January 1, 2020, is $180,000, and its cost is $150,000. 4. The equipment has an economic life of 8 years. Flynn depreciates all of its equipment on a straight-line basis. 5. Sunland set the annual rental to ensure a 5% rate of return. Flynn’s incremental borrowing rate is 6%, and the implicit rate of the lessor is unknown. 6. Collectibility of lease payments by the lessor is probable. Both the lessor and the lessee’s accounting periods end on December 31. Prepare all the necessary journal entries for Flynn for 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275.

Record journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit Right-of-Use Asset Lease Liability (To record the lease) Lease Liability Cash (To record the lease payment) Amortization Expense Right-of-Use Asset (To record amortization of the right-of-use asset) Interest Expense Interest Payable (To record interest expense)

Answer 1

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