Question

Blue Steel Company, as lessee, signed a lease agreement for equipment for 5 years, beginning December 31, 2020. Annual rental payments of $51,025are to be made at the beginning of each lease year (December 31). The interest rate used by the lessor in setting the payment schedule is 6%; Blue’s incremental borrowing rate is 8%. Blue is unaware of the rate being used by the lessor. At the end of the lease, Blue has the option to buy the equipment for $5,000, considerably below its estimated fair value at that time. The equipment has an estimated useful life of 7 years, with no salvage value. Blue uses the straight-line method of depreciation on similar owned equipment.

a.Prepare the journal entries, that Blue should record on December 31, 2020. (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 present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answers to 0 decimal places, e.g. 58,971.)

b. Prepare the journal entries, that Blue should record on December 31, 2021. (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.)

c. Prepare the journal entries, that Blue should record on December 31, 2022. (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. 58,971.)
d. What amounts would appear on Blue’s December 31, 2022, balance sheet relative to the lease arrangement? (Round answers to 0 decimal places, e.g. 58,971.)

Answer 1