At the beginning of 2024, VHF Industries acquired a machine with a fair value of $6,074,700 by signing a four-year lease. The lease is payable in four annual payments of $2 million at the end of each year.

Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)

Required:

1. What is the effective rate of interest implicit in the agreement?

2-4. Prepare the lessees journal entries at the beginning of the lease, the first lease payment at December 31, 2024 and the second lease payment at December 31, 2025.

5. Suppose the fair value of the machine and the lessors implicit rate were unknown at the time of the lease, but that the lessees incremental borrowing rate of interest for notes of similar risk was 11%. Prepare the lessees entry at the beginning of the lease