Business, 10.05.2021 19:50 klk597703

Stellar Leasing Company agrees to lease equipment to Pearl Corporation on January 1, 2020. The following information relates to the lease agreement. 1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years. 2. The cost of the machinery is $507,000, and the fair value of the asset on January 1, 2020, is $690,000. 3. At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $110,000. Pearl estimates that the expected residual value at the end of the lease term will be 110,000. Pearl amortizes all of its leased equipment on a straight-line basis. 4. The lease agreement requires equal annual rental payments, beginning on January 1, 2017. 5. The collectibility of the lease payments is probable. 6. Stellar desires a 10% rate of return on its investments. Pearl’s incremental borrowing rate is 11%, and the lessor’s implicit rate is unknown. (Assume the accounting period ends on December 31). Prepare the journal entries Pearl would make in 2017 and 2018 related to the lease arrangement.
Date Account Titles and Explanation Debit Credit
1//1/17 664702
Lease Liability 664702
(To record the lease.)
Lease Liability 127081
Cash 127081
(To record lease payment.)
12/31/17
(To record amortization.)
(To record interest.)
1/1/18 Lease Liability 127081
Cash 127081
12/31/18
(To record amortization.)
(To record interest.)

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Stellar Leasing Company agrees to lease equipment to Pearl Corporation on January 1, 2020. The follo...

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