29 Jun Question Berg Company leases manuf
Question
Berg Company leases manufacturing equipment from Newman Rentals Co. on January 1, 2012. The following data pertain to the agreement:
A. The term of the noncancelable lease is three years with no renewal option. A payment of $78,443 is due on December 31 of each year.
B. The fair value of the machine on January 1, 2012, is $300,000. The machine has a remaining economic life of 10 years, with no residual value. The machine reverts to the lessor upon termination of the lease. Berg guarantees a $100,000 residual value at the end of the lease term.
C. Berg Corp. depreciates all machinery it owns on a straight-line basis. Berg’s incremental borrowing rate is 8 percent per year. Berg does not have knowledge of the 5 percent implicit borrowing rate used by Newman.
Required:
1. Record the entries required on Berg’s books for the inception of the lease on January 1, 2012.
2. Record the entry on Berg’s books on December 31, 2012, to record depreciation of the leased asset.
3. Record the first lease payment on Berg’s books.
4. Assume that the transaction is considered a direct financing lease for Newman. Record the entries required on Newman’s books for the inception of the lease on January 1, 2012.
5. Record all entries necessary at the time of receipt of the first lease payment on Newman Rental’s books.
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