Rocket Corporation On July 1 of the current year, Rocket Corporation leased a machine from Denver Leasing, Inc. The lease calls for Rocket to make semiannual lease payments of $239,514 over a five-year lease term on each July 1 and December 31. The first payment is due immediately. Rocket’s incremental borrowing rate is 14%, which the same rate that Denver uses to calculate lease payments. There is no bargain purchase option or residual value. The asset is depreciated using the straight-line basis on December 31 of each year.

Refer to Rocket Corporation.
Required:
1. Determine the pre-tax amounts that Denver Leasing would record on its balance sheet and income statement as of December 31 of the current year.
2. Make the appropriate journal entries to record the lease and the related transactions from the inception of the lease through December 31 on Denver’s books.
3. Determine the pre-tax amounts that Denver Leasing would record on its balance sheet and income statement as of December 31 of the next year.

What will be an ideal response?

Answer:
1.
Current Assets:
Lease Receivable 288,557

Long-Term Assets
Lease Receivable $1,141,653

2.
July 1
Lease Receivable
1,800,000

Equipment

1,800,000
Cash
239,514

Lease Receivable

239,514

December 31
Cash
239,514

Interest Revenue

109,234
Lease Receivable

130,280

3.
Current Assets:
Lease Receivable $288,558

Long-Term Assets
Lease Receivable $1,141,649