Amirante SA manufactures a CT scanner with an estimated life of 12 years and leases it to Chambers Medical Center for a period of 10 years. The normal selling price of the machine is $2,000,000, and its guaranteed residual value at the end of the lease term is $300,000. The hospital will pay equal rentals at the beginning of each year starting January 1, 2019. The machine has a cost of $1,200,000 on Amirantes books on January 1, 2019. Amirante has determined that collectability of the lease payments is probable, and the implicit interest rate is 5%. The lease contains no renewal options, and the CT scanner reverts to Amirante upon termination of the lease. Chambers Medical Center has an incremental borrowing rate of 6% and an expects the residual value of the CT scanner at the end of the lease will be around $200,000. Chambers Medical Center is unaware that the Amirante used an implicit rate of 5% in setting the amount of annual rental.

Required: (Round all amounts to the nearest dollar.)

(a) Discuss the nature of this lease to the lessor. (5 marks)

(b) Calculate the amount of the annual rental payment which should be required. (2 marks)

(c) Calculate the present value of lease payments for the initial measurement of Lease Liability for the lessee. (2 marks)

(d) Prepare all necessary journal entries for the lessee, Chambers Medical Center, for 2019. (8 marks)

(e) Prepare all necessary journal entries for the lessor, Amirante SA, for 2019. (8 marks)

(f) Suppose Chambers Medical Center incurs legal fees related to the execution of the lease of $5,600. In addition, assume Chambers Medical Center receives a lease incentive of $40,000. Compute the initial balance of the Right-of-Use Asset. (3 marks)

PV of $1 PV of an Ordinary Annuity of $1 PV of an Annuity Due of $1 i = 5%, n = 10 0.61391 7.72173 8.10782 i = 6%, n = 10 0.55839 7.36009 7.80169