1. On January 1, 2013, Levin Furniture Company leases office space under a 21-year operating lease agreement. The contract calls for annual rent payments on December 31 of each year during the agreement. The payments are $19,500 the first year, increasing by $425 each year. The benefits expected by the lessee using this office space are expected to remain constant over the lease term.

Required: Record Levin's rent payment at December 31, 2017 (the 5th annual rental payment) and at December 31, 2027 (the 15th annual rental payment).

Account Debit Credit

2. At the beginning of 2018, Advanced Industries acquired a large, custom-made machine with a fair value of $7,331,130 by signing a three-year lease agreement. The lease is payable in three annual payments of $3.0 million at the end of each year.

Required:

a. What is the effective annual interest rate implicit in the agreement?

b. Prepare the lessee's journal entries required at the inception of the lease, the first lease payment which is due and paid December 31, 2018, and the second lease payment which is due and paid December 31, 2019.

Date Account Debit Credit

January 1, 2018:

December 31, 2018:

December 31, 2019:

c. Suppose the fair value of the machine and the lessor's implicit interest rate were unknown at the time of the lease, but you are able to determine that the lessee's incremental borrowing rate of interest for notes of similar "risk was 10%. Prepare the lessee's entry at the inception of the lease.

HINT: Use the Time Value of Money tables provided in previous tabs"

Account Debit Credit