On January 1, Year 1, Drake Co. leased equipment from Brewer, Inc. Lease payments are $100,000, payable annually every December 31 for 20 years. Title to the equipment passes to Drake at the end of the lease term. The lease is noncancelable.
Additional Facts:
The equipment has a $750,000 carrying amount on Brewer’s books. Its estimated economic life was 25 years on January 1, Year 1.
The rate implicit in the lease, which is known to Drake, is 10%.
Drake’s incremental borrowing rate is 12%.
Drake normally uses the straight-line method of depreciation for equipment.
The economic life of the equipment did not change as a result of the lease.
The rounded present value factors of an ordinary annuity for 20 years are as follows:
12% 7.5
10% 8.5
Required:
a. Record the journal entries for the following accounts for Drake on January 1, Year 1, if any.
b. Record the journal entries for the following accounts for Drake on December 31, Year 1, if any.
c. Record the journal entries for the following accounts for Drake on December 31, Year 1, if any.
d. Record the amounts for the following accounts in Drake's December 31, Year 2, balance sheet.
Answers: 3
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On January 1, Year 1, Drake Co. leased equipment from Brewer, Inc. Lease payments are $100,000, paya...
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