Question

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Ivanhoe Company, a machinery dealer, leased a machine to Dexter Corporation on January 1, 2017. The lease is for an 8-year period and requires equal annual payments of $31,300 at the beginning of each year. The first payment is received on January 1, 2017. Ivanhoe had purchased the machine during 2016 for $170,000. Collectibility of lease payments by Ivanhoe is probable. Ivanhoe set the annual rental to ensure a 7% rate of return. The machine has an economic life of 10 years with no residual value and reverts to Ivanhoe at the termination of the lease. Assume that Dexter Corporation does not know the rate implicit in the lease used by Ivanhoe, and Dexter’s incremental borrowing rate is 9%. In addition, assume that Dexter incurs initial direct costs of $13,000.

1.Compute the amount of the lease liability and right-of-use asset for Dexter.

2. Prepare all necessary journal entries for Dexter for 2017

Answer 1

Solution:

olution tties Date cyedit Del and e Plan $20,831 Se C. 13,000 188,831 e talily A 31, 300 eale atL C. 31,300 ash -)-300 1,831/825,229 年2,229 To Rtht of USe AsSets