1. ABC Company(20 points) is a company that leases equipment to other lessees. It is trying to determine the lease payments it should charge for a new truck that is being leased on January 1, 2015.

Cost of the Truck to ABC = $100,000	Fair Value of Truck = $100,000
Lease period = 5 years. Useful life of the truck = 5 years.	Rate of return expected by ABC = 10%
Payment terms: First payment on 1/1/2015, remaining payments on December 31 of each year (total five payments, including the first payment).	Other information: The expected fair value of the truck at the end of the lease is $10,000. The truck returns to ABC at the end of the lease. The lessee can buy the truck at its fair value at the end of the lease.

Required for ABC Company : Calculate the annual lease payments that ABC should ask. Show your calculations.

2. XYZ Company (20 points) leases a lathe machine from Fanuc company on January 1, 2015. The lease terms are as follows:

Lease payments = $20,000/year. Fair value of the machine = $65,000	Lease Term: 3 years. Useful life of the machine = 6 years.
Payment terms: First payment on 1/1/2015, remaining payments on December 31 of each year (total three payments, including the first payment).	Incremental borrowing rate of XYZ = 11%. Fanucs implicit rate of return = 10% and is known to XYZ
Expected fair value of the machine at the end of the lease = $25,000 Expected Fair value of the machine after 6 years = $0	Other terms: XYZ has the option to buy the machine for $1,000 at the end of the lease term.
XYZ uses straight line depreciation and records it annually on December 31 of each year.

Required for XYZ Company:

(1) What is included in the minimum lease payments?

(2) What is the discount rate to be used by XYZ company?

(3) Is this is a capital lease for XYZ? Why?

(4) Show journal entries to be recorded on 1/1/15

(5) Show journal entries to be recorded on 12/31/15