Please show all workings clearly. E21.16 (LO 2, 4) (Lessee Accounting, Initial Direct Costs) Rauch AG leasesa piece of equipment to Donahue SA on January 1, 2022. The lease agreementcalled 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, and a book value of €20,000. Both parties expect a residual value of€8,250 at the end of the lease term, though this amount is not guaranteed. Rauchset the lease payments with the intent of earning a 5% return, and Donahue isaware of this rate. There is no bargain purchase option, ownership of the leasedoes not transfer at the end of the lease term, and the asset is not of a specializednature.Instructionsa. Prepare the lease amortization schedule(s) for Donahue for all 4 years of thelease.b. Prepare the journal entries for Donahue for 2022 and 2023.c. Suppose Donahue incurs initial direct costs of €750 related to the lease.Prepare the journal entries for 2022.d. Explain how a fully guaranteed residual value by Donahue would change theaccounting for the company. The expected residual value is €8,250.e. Explain how a bargain renewal option for one extra year at the end of thelease term would change the accounting of the lease for Donahue.

Rauch AG leases a piece of equipment to Donahue SA on Jan 01, 2022. Annual lease payments is 4892 at…

a. Prepare the lease amortization schedule(s) for Donahue for all 4 years of the lease. b. Prepare the journal entries for Donahue for 2022 and 2023. c. Suppose Donahue incurs initial direct costs of €750 related to the lease. Prepare the journal entries for 2022.

a. Prepare the lease amortization schedule(s) for Donahue for all 4 years of the lease. b. Prepare the journal entries for Donahue for 2022 and 2023. c. Suppose Donahue incurs initial direct costs of €750 related to the lease. Prepare the journal entries for 2022.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.

Question

Please show all workings clearly.

E21.16 (LO 2, 4) (Lessee Accounting, Initial Direct Costs) Rauch AG leases
a piece of equipment to Donahue SA on January 1, 2022. 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, and a book value of €20,000. 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.
Instructions
a. Prepare the lease amortization schedule(s) for Donahue for all 4 years of the
lease.
b. Prepare the journal entries for Donahue for 2022 and 2023.
c. Suppose Donahue incurs initial direct costs of €750 related to the lease.
Prepare the journal entries for 2022.
d. Explain how a fully guaranteed residual value by Donahue would change the
accounting for the company. The expected residual value is €8,250.
e. Explain how a bargain renewal option for one extra year at the end of the
lease term would change the accounting of the lease for Donahue.

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