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17 July, 05:04

Wildhorse Corporation enters into a 6-year lease of equipment on December 31, 2019, which requires 6 annual payments of $40,100 each, beginning December 31, 2019. In addition, Wildhorse guarantees the lessor a residual value of $20,300 at the end of the lease. However, Wildhorse believes it is probable that the expected residual value at the end of the lease term will be $10,150. The equipment has a useful life of 6 years. Prepare Wild Horses' December 31, 2019, journal entries assuming the implicit rate of the lease is 11% and this is known to Wildhorse

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  1. 17 July, 06:45
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    31-Dec-19

    Dr. Lease receivables $ 180,498

    Cr. Sales revenue $180,498

    Dr. Cost of goods sold $ 170,000

    Cr. Inventory $ 170,000

    Explanation:

    The lease is recorded on the present value of all the payment to be made in the future.

    We will use the present value of annuity formula

    Present value of Lease = P [ (1 - (1 + r) ^-n) / r ]

    where

    P = annual payment = $40,100

    r = implicit rate = 11%

    n = numbers of payments = 6 payments

    Placing values in the formula

    PV of Lease = $40,100 x [ (1 - (1 + 11%) ^-6) / 11% ] = $169,645

    Now calculate the present value of guarantee residual value

    PV of guarantee residual value = $20,300 x (1 + 11%) ^-6 = $10,853

    Fair value of lease = Present value of Lease payment + Present value of guarantee residual value

    Fair value of lease = $169,645 + $10,853 = $180,498

    Cost of equipment will be recorded in the cost of goods sold and Inventory as well.

    We will pass two separate journal entries first to record the lease receivable and second to record the cost of the equipment.
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