The Timmer Company signs a lease agreement dated January 1, 2007 that provides for it to lease equipment from Landau Company beginning January 1, 2007. The lease terms, provisions, and related events are as follows:
The lease is non-cancellable and has a term of five years. The annual rentals are $83,222.92, payable at the end of each year, and provide Landau with a 12% annual rate of return on its net investment. The Timmer Company agrees to pay all executor costs at the end of each year. In 2007 these were: insurance $3,760; property taxes, $5,440. In 2008: insurance, $3,100; property taxes, $5,330. There is no renewal or bargain purchase option. Timmer estimates that the equipment has an economic life of five years and a zero residual value. Timmer’s incremental borrowing rate is 16%, it knows the rate implicit in the lease, and it uses the straight-line method to record depreciation on similar equipment.
- Calculate the amount of the asset and liability of the Timmer Company at the inception of the lease. (Round to the nearest dollar.)
- Prepare a table summarizing the lease payments and interest expense.
- Prepare journal entries on the books of Timmer for 2007 and 2008.
- Prepare a partial balance sheet in regard to the lease for Timmer for December 31, 2007.
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