On January 1, 20x1,Winslow leased equipment from Queen Anne. The ten-year lease requires Winslow to pay Queen Anne $12,000 annually on December 31, 20x1-20x10.
Winslow's incremental borrowing rate was 8% on January 1, 20x1, and 6% on December 31, 20x2, (January 1, 20x3).
On January 1, 20x1, Winslow incurred the following costs related to the lease of the equipment:
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Broker's commission to find asset
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$9,000
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External legal fees to write lease contract
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4,000
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Payment to current lessee to surrender asset for lease to Winslow
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7,000
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$20,000
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The leased equipment has a useful life of 30 years.
On December 31, 20x2, Winslow tested the asset for impairment when there was a significant decrease in the usage of the asset. Since the net future cash flows were less than the fair value of the asset the asset was impaired. (The equipment's fair value was $60,000).
1. Prepare the entry needed by Winslow to record the impairment on December 31, 20x2.
2. Prepare all entries needed by Winslow to record the lease during 20x3.