On January 1, 2012, Palmer Company leased equipment to Woods Corporation. The fo

Question

On January 1, 2012, Palmer Company leased equipment to Woods Corporation. The following information pertains to this lease.

1.
The term of the noncancelable lease is 6 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease. 2.
Equal rental payments are due on January 1 of each year, beginning in 2012. 3.
The fair value of the equipment on January 1, 2012, is $219,800, and its cost is $173,642. 4.
The equipment has an economic life of 8 years, with an unguaranteed residual value of $11,660. Woods depreciates all of its equipment on a straight-line basis. 5.
Palmer sets the annual rental to ensure an 9% rate of return. Woods

Explanation / Answer

1/1/12 Leased Equipment Dr $ 208543

Lease Liability Cr $208543

Lease Liability Dr $43530

Cash Cr $43,530

12/31/12 Depreciation Expense Dr 34757

Accumulated Depreciation Cr $34757

Interest Expense Dr $16501

Interest Payable Cr $16501

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