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ACT3392SpringTraditionalHWCh21solution - HOMEWORK SPRING...

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HOMEWORK - SPRING 2010 1. (4 points) On January 1, 2011, Hernandez signed a ten-year noncancelable lease. The lease stipulated annual payments of $150,000 starting on 12-31-2011. Title passes to Hernandez at the expiration of the lease. The drill press has an estimated useful life of 15 years, with no salvage value. Hernandez uses straight-line depreciation for all of its plant assets and uses the effective-interest method of amortization. Hernandez’s incremental borrowing rate is 10% on January 2, 2011. a. Prepare the journal entry Hernandez should make on January 1, 2011. Leased equipment (PPE – a long-term asset) $921,685 Lease liability $921,685 b. Prepare the journal entries Hernandez should make on December 31, 2011. Lease liability $57,831 Interest expense 92,169 Cash $150,000 Depreciation expense $61,446 Accumulated depreciation $61,446 2. (4 points) As lessee, Hughey Co. recorded a capital lease of machinery on January 1, 2011. The seven annual lease payments of $350,000 are made every December 31 starting 12-31-11. Hughey’s incremental borrowing rate is 10% on January 1, 2011.
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