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Question - Sage Company manufactures a check-in kiosk with an estimated economic life of 12 years and leases it to Pronghorn Airlines for a period of 10 years. The normal selling price of the equipment is $256,597, and its unguaranteed residual value at the end of the lease term is estimated to be $20,400. Pronghorn will pay annual payments of $36,800 at the beginning of each year and all maintenance, insurance, and taxes. Sage incurred costs of $181,800 in manufacturing the equipment and $4,300 in negotiating and closing the lease. Sage has determined that the collectability of the lease payments is reasonably predictable, that no additional costs will be incurred, and that the implicit interest rate is 10%. Pronghorn Airlines having an incremental borrowing rate of 10%.
1. Compute the amount of the initial obligation under capital leases.
2. Prepare a 10-year lease amortization schedule.
3. Prepare all of the lessee's journal entries for the first year. Assume straight-line depreciation.
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