Question & Answer: Culver Corporation leased equipment to Splish Brothers, Inc. on January 1, 2017. The lease agreement called for annual rental payments of…..

Culver Corporation leased equipment to Splish Brothers, Inc. on January 1, 2017. The lease agreement called for annual rental payments of $1,135 at the beginning of each year of the 3-year lease. The equipment has an economic useful life of 7 years, a fair value of $9,500, a book value of $7,500, and Culver expects a residual value of $7,000 at the end of the lease term. Culver set the lease payments with the intent of earning a 4% return, though Splish Brothers is unaware of the rate implicit in the lease and has an incremental borrowing rate of 6%. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature.

1. Prepare all necessary journal entries for Splish Brothers in 2017

a. 1/1/17 to record the lease:

b. 1/1/17 to record lease liability:

c. 12/31/17

How would the measurement of the lease liability and right-of-use asset be affected if, as a result of the lease contract, Splish Brothers was also required to pay $600 in commissions, prepay $800 in addition to the first rental payment, and pay $200 of insurance each year?

lease liability:

right of use of asset:

Suppose, instead of a 3-year lease term, Splish Brothers and Culver agree to a one-year lease with a payment of $1,135 at the start of the lease. Prepare necessary journal entry for Splish Brothers in 2017.

1/1/17: