Question

Brief Exercise 21A-22

Pearl Corporation enters into a 6-year lease of equipment on December 31, 2016, which requires 6 annual payments of \$36,100 each, beginning December 31, 2016. In addition, Pearl guarantees the lessor a residual value of \$19,800 at the end of the lease. However, Pearl believes it is probable that the expected residual value at the end of the lease term will be \$9,800. The equipment has a useful life of 6 years.

Prepare Pearls’ December 31, 2016, journal entries assuming the implicit rate of the lease is 10% and this is known to Pearl. (Credit account titles are automatically indented when amount is entered. Do not indent manually. For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to 0 decimal places e.g. 5,275.)

Date

Account Titles and Explanation

Debit

Credit

December 31, 2016

(To record the lease liability)

December 31, 2016

(To record lease payment)

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