Problem: The Beloit Bearing Company leased a machine from J. Case Leasing Company. The lease requires 10 annual payments of $10,000 beginning immediately. The lease contract specifies the rate implicit in the lease of 12% and a purchase option of $10,000 at the end of the tenth year. The estimated fair market value of the machine at the end of the lease is $20,000. Beloit Bearing Company is reasonably certain to exercise the purchase option. Beloit Bearings cost of capital (borrowing rate) is also 12%.
The present value of an annuity due of 1 at: 12% for 10 years is 6.328
The present value of 1 at: 12% for 10 years is .322
Required:
Question 1: What amounts should Beloit Bearing record as the lease liability and value of the right of use asset?
Question 2: Present the journal entry for this transaction.
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