E21.2 (LO 2, 4) (Lessee Entries; Finance Lease with Unguaranteed Residual Value) On December 31, 2019, Burke Corporation signed a 5-year, non-cancelable lease for a machine. The terms of the lease called for Burke to make annual payments of $8,668 at the beginning of each year, starting December 31, 2019. The machine has an estimated useful life of 6 years and a $5,000 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Burke uses the straight-line method of depreciation for all of its plant assets. Burke's incremental borrowing rate is 5%, and the lessor's implicit rate is unknown.

E21.2 (p. 21-61) (Point Values are provided by each part)

Please refer to the problem in the Course Text for all of the applicable details. Please show your work.

Part (a) (+0.5 points focused on the explanation)

From the perspective of the Burke (lessee), what type of lease is this? (Please place an X in the box to the left of your answer)

Finance

Operating

How do you know? (Explain below.)

Part (b) (+1 point 0.5 points for the answer; 0.5 points for the calculation)

Present value of the lease payments (Lease Liability from Burkes perspective):

Related Calculation:

Part (c) (+9 points each account-amount combination is worth 1 point)

December 31, 2019 [Hint: Space for 2 Entries]

ASSETS		=	LIABILITIES		+	EQUITY
+	-		-	+		-	+

Entry 1:

Entry 2:

December 31, 2020 [Hint: Space for 2 Entries]

ASSETS		=	LIABILITIES		+	EQUITY
+	-		-	+		-	+

Entry 1:

Entry 2: