1. On December 31, year 1, Day Co. leased a new machine from Parr with the following pertinent information:

Lease term 8 years

Annual rental payable at beginning of each year $60,000

Useful life of machine 10 years

Day'sincremental borrowing rate 15%

Implicit interest rate in lease (known by Day) 12%

The lease is not renewable, and the machine reverts to Parr at the termination of the lease. The cost of the machine on Parr's accounting records is $425,000.

Required: At the beginning of the lease term, what should Day record as a lease liability?

2. Timken Company issues a $1,500,000 bond at 10% for 10 years. The market interest rate is 9%.

Required:

a) What is the issue price of these bonds and the bond discount or premium?

b) Assume that Timken uses the effective interest method to amortize the bond discount or premium for the semiannual interest payments, what is the interest expense and the amount of cash paid on the first interest payment?