Marigold Corporation enters into a 7-year lease of equipment on December 31, 201

Question

Marigold Corporation enters into a 7-year lease of equipment on December 31, 2016, which requires 7 annual payments of $37,500 each, beginning December 31, 2016. In addition, Marigold guarantees the lessor a residual value of $18,700 at the end of the lease. However, Marigold believes it is probable that the expected residual value at the end of the lease term will be $8,700. The equipment has a useful life of 7 years. Assume that for Lost Ark Company, the lessor, collectibility of lease payments is probable and the carrying amount of the equipment is $170,000. Prepare Lost Ark's 2016 and 2017 journal entries, assuming the implicit rate of the lease is 9% and this is known to Marigold. (Credit account titles are automatically indented when amount is entered Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to O decimal places e.g. 5,275.) Account Titles and Explanation December 31, 2016 To record the lease) December 31, 2016 (To record receipt of lease payment) December 31, 2017

Explanation / Answer

1. To record the lease:

Lease Receivable                   170,000

      Equipment                                        170,000

2. To record the receipt of lease payment

Cash                                37,500

       Lease Receivable                   37,500

3. To record Depreciation:

Depreciation Expense                   23,043

              Accumulated Depreciation - Capital Lease            23,043

(170,000 - 8,700) / 7 = 23042.8571

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