Morey Corporation Leases a Tractor from Equity Leasing with a Five-Year

question 12

Multiple Choice

Morey Corporation leases a tractor from Equity Leasing with a five-year non-cancelable lease on January 1, 2014 under the following terms:
1. Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year.
2. The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor.
3. The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term.
4. The tractor has a six-year economic life.
5. Morey has an excellent credit rating.
6. Equity offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer.
-Which of the following entries will Equity Leasing prepare to record the receipt of the first payment on December 31,2011?

• A) DR Cash\(\quad\) \(26,379.74\)
• CR Financing income-Leases\(\quad\)\(26,379.74\)
• B) DR Cash \(\quad\)\(26,379.74\)
• CR Unearned financing income-Leases\(\quad\)\(26,379.74\)
• C) DR Cash\(\quad\)\(26,379.74\)
• CR Leased equipment\(\quad\)\(26,379.74\)
• D) DR Cash\(\quad\)\(26,379.74\)
• CR Gross investment in leased asset\(\quad\)\(26,379.74\)

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Definitions:

Opposable Thumbs

A feature of some primates' hands, allowing the thumb to touch the fingertips of the same hand, enabling grasping and manipulation of objects.

Bipedally

Walking on two feet as the primary form of locomotion, characteristic of humans and their ancestors.

Hominoids

A taxonomic group of primates that includes apes and humans, characterized by higher intelligence and more complex social structures compared to other primates.