1. Assume the following data for equipment leased from Buckeye Company. The lease term is 4 years and requires equal rental payments of $30,000 at the beginning of each year. The equipment has a fair value at the inception of the lease of $137,000, an

estimated useful life of 7 years, and no residual value. Wilson pays all executory costs directly to third parties. Buckeye set the annual rental to earn a rate of return of 10%, and this fact is known to Wilson. The lease does not transfer title or contain a bargain-purchase option. How should Wilson classify this lease?

2. Taylor Company leased equipment from Titleist Company. The lease term is 5 years and requires equal rental payments of $42,019 at the beginning of each year. The equipment has a fair value at the inception of the lease of $149,000, an estimated useful life of 4 years, and no salvage value. Taylor pays all executory costs directly to third parties. The appropriate interest rate is 10%.

Prepare Taylors January 1, 2014, journal entries at the inception of the lease.

3. Assume that Super Stroke leased equipment that was carried at a cost of $149,000 to Zl1 Company. The term of the lease is 6 years beginning January 1, 2014, with equal rental payments of $30,044 at the beginning of each year. All executory costs are paid by Zl1 Company directly to third parties. The fair value of the equipment at the inception of the lease is $149,000. The equipment has a useful life of 5 years with no salvage value. The lease has an implicit interest rate of 8%, no bargain-purchase option, and no transfer of title. Collectibility is reasonably assured with no additional cost to be incurred by Super Stroke. Prepare Super Strokes January 1, 2014, journal entries at the inception of the lease.

4. Super Charged Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Chevy Corp to make annual payments of $9,668 at the beginning of each year, starting January 1, 2014. The machine has an estimated useful life of 5 years and a $5,000 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Chevy Corp uses the straight-line method of depreciation for all of its plant assets. Chevy Corps incremental borrowing rate is 10%, and the Lessors implicit rate is unknown.

Instructions

(a) What type of lease is this? Explain.

(b) Compute the present value of the minimum lease payments.

(c) Prepare all necessary journal entries for Chevy Corp for this lease through January 1, 2015.