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On January 1, 2008, Garnett Company (as lessor) entered into a noncancelable lease agreement with Rush Company for machinery which was carried on the...

On January 1, 2008, Garnett Company (as lessor) entered into a noncancelable lease agreement with Rush Company for machinery which was carried on the accounting records of Garnett at $4,530,000 and had a market value of $5,000,000. Minimum lease payments under the lease agreement which expires on December 31, 2017, total $7,100,000. Payments of $710,000 are due each January 1. The first payment was made on January 1, 2008 when the lease agreement was finalized. The interest rate of 10% which was stipulated in the lease agreement is the implicit rate set by the lessor. The effective-interest method of amortization is being used. Rush expects the machine to have a ten-year life with no salvage value, and be depreciated on a straight-line basis. Collectability of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.
a. From Rush Company’s viewpoint, what kind of lease is the above agreement? Explain all the applicable support for your answer. (2 points)






b. From Garnett Company’s viewpoint, what kind of lease is the above agreement? Explain all the applicable support for your answer. (2 points)





c. Prepare the Rush Company’s journal entries at the inception of the lease. (2 points)
Date Accounts Debit Credit






d. Prepare the Garnett Company’s journal entries at the inception of the lease. (2 points)
Date Accounts Debit Credit







e. Prepare the Rush Company’s journal entries that relate to the above lease agreement for December 31, 2008. (3 points)
Date Accounts Debit Credit








e. What will appear in Rush Company’s yearend financial statements dated 12/31/08? (5 points)
Income statement:


Balance sheet:





Statement of cash flows:



f. Prepare the Garnett Company’s journal entries that relate to the above lease agreement for December 31, 2008. (4 points)
Date Accounts Debit Credit






f. What will appear in Garnett Company’s yearend financial statements dated 12/31/08? (4 points)
Income statement:



Balance sheet:


Statement of cash flows



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