Patsy Co. and Philip Inc. sign a lease agreement dated January 1, 2020. The lease agreement specifies that Patsy (lessor) will grant right-of-use to Philip (lessee) of one of its machines that is not of a specialized nature. The lease term is non-cancelable and has a 3-year term. On January 1, 2020, the machine has a cost and fair value of $240,000, an estimated economic life of five years, and a residual value at the end of the lease of $48,000 (unguaranteed). The machine reverts to Patsy at the end of the lease term and the lease contains no renewal options. Patsy used a 6 percent rate when calculating the lease payments, and Philip is aware of this rate. Philip’s incremental rate is 8%. The payments are to be made at the beginning of the year with the first payment on January 1, 2020. Use the following PV factors: (See Attachment) Which of the following is correct regarding the journal entry made by Philip on December 31, 2020?

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Patsy Co. and Philip Inc. sign a lease agreement dated January 1, 2020. The lease agreement specifies that Patsy (lessor) will grant right-of-use to Philip (lessee) of one of its machines that is not of a specialized nature. The lease term is non-cancelable and has a 3-year term. On January 1, 2020, the machine has a cost and fair value of $240,000, an estimated economic life of five years, and a residual value at the end of the lease of $48,000 (unguaranteed). The machine reverts to Patsy at the end of the lease term and the lease contains no renewal options. Patsy used a 6 percent rate when calculating the lease payments, and Philip is aware of this rate. Philip’s incremental rate is 8%. The payments are to be made at the beginning of the year with the first payment on January 1, 2020. Use the following PV factors: (See Attachment)

Which of the following is correct regarding the journal entry made by Philip on December 31, 2020?

Philip will credit Lease Liability $70,480.32
Philip will debit Lease Expense $62,727.24
Philip will credit Right-of-Use Asset for $62,727.24
Philip will debit Interest Expense for $7,753.08
PV annuity due, 3 periods, 6%
PV annuity due, 3 periods, 8%
PV ordinary annuity, 3 periods, 6%
PV ordinary annuity, 3 periods, 8%
PV single sum, 3 periods, 6%
PV single sum, 3 period 8%
2.83339
2.78326
2.67301
2.57110
.83962
.79383
Transcribed Image Text:PV annuity due, 3 periods, 6% PV annuity due, 3 periods, 8% PV ordinary annuity, 3 periods, 6% PV ordinary annuity, 3 periods, 8% PV single sum, 3 periods, 6% PV single sum, 3 period 8% 2.83339 2.78326 2.67301 2.57110 .83962 .79383
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