question salk company on january 1 20×4 enters into a five years noncancellable leas 4291221
Question
Salk Company on January 1, 20X4, enters into a five years, noncancellable lease, with four renewal options of one year each, for equipment having an estimated useful life of 10 years and a fair value to the lessor, Jonas Corp., at the inception of the lease, of $9,000,000. Salk's incremental borrowing rate is 8%. Salk uses the straight line method to depreciate its assets. The lease contains the following provisions.
REQUIRED: (1) What kind of lease is this to Salk Company? Give reasons to support your answer.
(2) What should be considered the lease term? Explain the reason for your answer.
(3) What are the amount of the minimum lease payments? Explain your answer.
(4) What is the present value of the minimum lease payments? Show supporting calculations.
(5) Prepare the general journal entries, in proper form, that Salk would record during the first year of the lease. Show all appropriate supporting calculations. Provide a brief explanation for the entry and the appropriate date on which the entry would be made.
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a |
Rental payments of $657,000, including $57,000 for property taxes, are payable at the beginning of each six month period. |
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b |
A termination penaltyassuring renewal of the lease for a period of four years after expiration of the initial lease term. |
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c |
An option allowing the lessor to extend the lease one year beyond the last renewal exercised by the lessee |
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d |
A guarantee by Salk Company that Jonas Corp. will realize $300,000 from selling the asset at the expiration of the lease. However, the actual residual value is expected to be $180,000. |