Question

Grouper Leasing Company agrees to lease equipment to Monty 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 $500,000, and the fair value of the asset on January 1, 2020, is $659,000.

3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $60,000. Monty estimates that the expected residual value at the end of the lease term will be 60,000. Monty 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. Grouper desires a 9% rate of return on its investments. Monty’s incremental borrowing rate is 10%, and the lessor’s implicit rate is unknown.

(Assume the accounting period ends on December 31.)

(d)

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Prepare the journal entries Monty would make in 2020 and 2021 related to the lease arrangement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places e.g. 58,972. Record journal entries in the order presented in the problem.)

Date	Account Titles and Explanation	Debit	Credit
1/1/2012/31/201/1/2112/31/21
	(To record the lease.)
	(To record lease payment.)
1/1/2012/31/201/1/2112/31/21
	(To record amortization.)
	(To record interest.)
1/1/2012/31/201/1/2112/31/21
1/1/2012/31/201/1/2112/31/21
	(To record amortization.)
	(To record interest.)

Answer 1