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Question
On October 1, 2011, Kelly Company leased a boat from Grant Company. The lease is noncancelable and requires five equal annual payments of $50,000 each. The lease payments are due each October 1, beginning October 1, 2011. The boat is recorded on Grant's books at $180,000, but its fair value is $207,542. Grant expects that the boat's residual value at the end of the lease term will be $10,000, but it is not guaranteed by Kelly. However, Kelly has an option to purchase the boat for $10,000 at the end of the lease term. At the inception of the lease, the boat has a remaining economic life of six years with a $2,500 estimated salvage value at the end of its life. Both firms use the straight-line method of depreciation and have December 31 year-ends for financial reporting purposes. The interest rate used by Grant Company to calculate the annual lease payment is 12%, and known by Kelly. Collection of the lease payments is reasonably predictable by Grant.
Required:
1. Complete the following table for Grant's and Kelly's December 31, 2011 income statements:
Grant (Lessor) Kelly (Lessee)
Sales
Interest income
Rent revenue
Cost of goods sold
Depreciation expense
Rent expense
Interest expense
Be sure to show and clearly label all calculations.
Answer
This answer is hidden. It contains 263 characters.
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