On 12/31/16, DEF Corp

Subject:SociologyPrice:4.89 Bought3

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On 12/31/16, DEF Corp. leased equipment to GHI Corp. The following information pertains to the lease agreement: . The terms of the non-cancelable lease are 5 years with no renewal option. At the termination of the lease, the equipment reverts back to the lessor. . Equal rental payments of $5,000 are due at the beginning of each year starting 12/31/16. . The equipment is not of a specialized use. . The cost of the asset to the lessor is $20,000. The FMV of the asset at 12/31/16 is $40,000. The equipment has an economic life of 6 years. . The equipment has an expected residual value of $1,600, though DEF Corp. has guaranteed a residual value of $2,000 to GHI Corp. DEF Corp. depreciates all of its equipment on a straight-line basis. The agreement requires equal annual rental payments, starting 12/31/16. DEF Corp.'s incremental borrowing rate is 7% per year. The implicit rate is also 7%. Collectability of the lease payments is probable. The present value of the lease payments, rounded to the nearest dollar, is $21,936 (N = 5, 1 = 7%, PMT = 5,000, FV = 0, CPT PV using annuity due) The present value of the guaranteed residual value, rounded to the nearest dollar, is $1,426 (N = 5, 1 = 7%, PMT = 0, FV = 2,000, CPT PV using annuity due) The present value of the guaranteed residual expected to be owed, rounded to the nearest dollar, is $285 (N = 5, 1 = 7%, PMT = 0, FV = 400, CPT PV using annuity due) Assume that the lease is a sales-type lease and record the journal entries for the lessor. a. Prepare the journal entries for the lessor at the inception of the lease on 12/31/16, including the first lease payment received: