Jensen Corporation leased industrial equipment to Francis Manufacturing on January 1, 2019. The following facts pertain to the lease: The lease term is 4 years. The annual lease payment is due at the beginning of each year starting on January 1, 2019. Each annual lease payment is $269,282 Ownership does not transfer at the end of the lease term and there is no bargain purchase option. The asset is not of a specialized nature. The industrial equipment has a fair value of $1,000,000, a book value to Jensen Corporation of $900,000, and a useful life of 5 years. Francis Manufacturing depreciates similar equipment using the straight-line method. The lease contains a guaranteed residual value of $50,000. The expected residual value is greater than $50,000. Jensen Corporation wants to earn a return of 8% on the lease, and collectability of the payments is probable. This rate is known by Francis Manufacturing. Francis Manufacturing’s incremental borrowing rate is 6%. Prepare the journal entries required for Francis Manufacturing (Lessee) on January 1, 2019; December 31, 2019; and January 1, 2020

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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Jensen Corporation leased industrial equipment to Francis Manufacturing on January 1, 2019. The following facts pertain to the lease:

The lease term is 4 years.
The annual lease payment is due at the beginning of each year starting on January 1, 2019. Each annual lease payment is $269,282
Ownership does not transfer at the end of the lease term and there is no bargain purchase option.
The asset is not of a specialized nature.
The industrial equipment has a fair value of $1,000,000, a book value to Jensen Corporation of $900,000, and a useful life of 5 years. Francis Manufacturing depreciates similar equipment using the straight-line method.
The lease contains a guaranteed residual value of $50,000. The expected residual value is greater than $50,000.
Jensen Corporation wants to earn a return of 8% on the lease, and collectability of the payments is probable. This rate is known by Francis Manufacturing.
Francis Manufacturing’s incremental borrowing rate is 6%.

Prepare the journal entries required for Francis Manufacturing (Lessee) on January 1, 2019; December 31, 2019; and January 1, 2020

Date	Account	Debit	Credit

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