Question

Question 3 Rauch Incorporated leases a piece of equipment to Donahue Corporation on January 1, 2020. The lease agreement called for annual rental payments of $4,892 at the beginning of each year of the 4-year lease. The equipment has an economic useful life of 6 years, a fair value of $25,000, a book value of $20,000, and both parties expect a residual value of $8,250 at the end of the lease term, though this amount is not guaranteed. Rauch set the lease payments with the intent of earning a 5% return, and Donahue is aware of this rate. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature. Click here to view factor tables. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) (a) Your answer is correct. What is the amount of the rental payments used in the lease agreement? (Round answer to 0 decimal places, e.g. 5,275.) Rental payments 4892 SHOW LIST OF ACCOUNTS SHOW SOLUTION LINK TO TEXT LINK TO TEXT Attempts: 4 of 15 used

Answer 1

Answer :-

a) The amount of the rental payments used in the lease agreement is $4,892. As in the question it was given that the lease agreement called for annual rental payments of $4,892 at the beginning of each year.

Rental payments - $4,892

b) Journal entries for Rauch for 2020 are as follows :-

Date	Account Title and Explanation	Debit	Credit
1/1/20	Cash	$4,892
	Unearned lease revenue		$4,892
12/31/20	Unearned lease revenue	$4,892
	Lease revenue		$4,892
	( To record the recognition of the revenue)
12/31/20	Depreciation Expenses ( Book value of equipment/useful life of equipment = $20,000/ 6 years)	$3,333
	Accumulated Depreciation - Leased Equipment		$3,333
	( To record depreciation expense on the leased equipment )