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accounting for lease mdash lessee and lessor astle manufacturing company manufacture 692687

Accounting for Lease—Lessee and Lessor

Astle Manufacturing Company manufactures and leases a variety of items. On January 2, 2008, Astle leased a piece of equipment to Haws Industries Co. The lease is for six years for an annual amount of $33,500, payable in advance. The lease payment includes executory costs of $1,500 per year. The equipment has an estimated useful life of nine years, and it was manufactured by Astle at a cost of $120,000. It is estimated that the equipment will have a residual value of $60,000 at the end of the 6 year lease term. There is no provision for purchase or renewal by Haws at the end of the lease term. However, a third party has guaranteed the residual value of $60,000. The equipment has a fair market value at the lease inception of $187,176. The implicit rate of interest in the contract is 10%, the same rate at which Haws can borrow money at its bank. All lease payments after the first one are made on December 31 of each year. Both companies use the straight line method of depreciation.

Instructions:

1. Give all the entries relating to the lease on the books of the lessor and lessee for 2008.

2. Show how the lease would appear on the balance sheet of Astle Manufacturing Company and Haws Industries Co. (if applicable) as of December 31, 2008.

3. Assume that Astle sold the equipment at the end of the 6 year lease for $85,000. Give the entry to record the sale, assuming that all lease entries have been properly made.

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