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27 February, 03:14

On January 2, 2021, Hanson Leasing Company leases equipment to Foley Co. with 5 equal annual payments of $240,000 each, payable beginning January 2, 2021. Foley Co. agrees to guarantee the $150,000 residual value of the asset at the end of the lease term. The expected value of the residual is $0. Foley's incremental borrowing rate is 10%, however, it knows that Hanson's implicit interest rate is 8%. The journal entry Hanson makes on January 2, 2021, includes a debit to a right-of-use asset for.

PV Annuity DuePV Ordinary AnnuityPV Single Sum

8%, 5 periods 4.31213 3.99271.68508

10%, 5 periods 4.16986 3.79079.62092

a. $897,674.

b. $1,034,910.

c. $1,061,013.

d. $1,137,673.

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Answers (1)
  1. 27 February, 06:59
    0
    The correct answer is (d) $1137673

    Explanation:

    Solution

    Journal Entry:

    The Equal annual payments 240000

    X PV Annuity Due 8%, 5 periods 4.31213

    Present value of Equal annual payments 1034911

    The Residual value 150000

    X PV Single 8%, 5 periods 0.68508

    Present value of residual value 102762

    Present value of Equal annual payment 1034911

    Add: Present value of residual value 102762

    The Debit to right-of-use asset 1137673
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