Precision Pumps On January 1, 2019, Precision Pumps Leases Nonspecialized Pumping Equipment

question 75

Essay

Precision Pumps
On January 1, 2019, Precision Pumps leases nonspecialized pumping equipment to Mega Construction. The equipment is delivered on January 1. The lease term is 4 years with no renewal or purchase options, and title to the leased asset is retained by the lessor at the end of the lease term. The lease requires annual fixed rental payments of $7,000 per year beginning on January 1, 2019, and then December 31 of each year starting on December 31, 2019. The fair value of the equipment is $37,592 and has a carrying amount on Precision's books of $22,000. The equipment has a remaining life of 8 years. The estimated residual value of the equipment is $15,000. The lessee does not guarantee the residual value, but Precision secured an unrelated third party to guarantee $15,000; collection of this guaranteed residual value and lease payments is reasonably certain. The rate implicit in the lease is 6%. There are no prepaid rentals, and neither party to the agreement pays initial direct costs.
-Assuming that Precision Pumps classifies this lease as a direct financing lease, prepare the journal entries for the commencement of the lease and the payment of the first and second lease payments.

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Definitions:

Larynx

The voice box located in the throat, which contains the vocal cords and is involved in breathing, producing sound, and protecting the trachea against food aspiration.

Adam's Apple

The prominent protrusion in the neck, formed by the thyroid cartilage of the larynx, more prominent in males.

Cricoid

The cricoid is a cartilage ring located in the larynx (voice box) at the top of the trachea; it plays a key role in keeping the airway open for respiration.

Arytenoids

Cartilages located in the larynx that are crucial for voice production because they anchor vocal cords and control their tension.