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Business, 23.03.2020 19:47 ladybugys

Larkspur Leasing Company agrees to lease equipment to Cullumber 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 $505,000, and the fair value of the asset on January 1, 2020, is $719,000.
3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $45,000. Cullumber estimates that the expected residual value at the end of the lease term will be 45,000. Cullumber 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. Larkspur desires a 9% rate of return on its investments. Cullumber’s incremental borrowing rate is 10%, and the lessor’s implicit rate is unknown.

(Assume the accounting period ends on December 31.)

Compute the value of the lease liability to the lessee. (Round present value factor calculations to 5 decimal places, e. g. 1.25124 and the final answer to 0 decimal places e. g. 58,972.)

Prepare the journal entries Cullumber 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.)

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