Eubank Company, as lessee, enters into a lease agreement for equipment.

• The term of the noncancelable lease is 4 years. Payments of $978,446 are due each Jan. 1st, beginning Jan. 1, 2020.
• Guaranteed residual value of the lease is $300,000. Eubank Company expects the value of the equipment at the end of the lease to be equal to the residual value of the lease.
• The fair value of the equipment is $3,800,000. The estimated life of the equipment is 6 years.
• Eubank depreciates similar machinery it owns using the straight-line method.
• Eubanks incremental borrowing rate is 8% per year.

For PV calculations use a calculator or use the appropriate factor from the tables. The three possible choices from the tables for an annuity due, an ordinary annuity and a single sum are as follows:

PV AD (n=4, i=8%) factor = 3.577101

PV OA (n=4, i=8%) factor = 3.312127

PV single sum (n=4, i=8%) factor = .735026667

Required:

a) What type of lease is this and why? Demonstrate (with calculations) your conclusion with one of the five tests.

b) Prepare all required entries on January 1, 2020 required by Eubank Company. (Round) Hint 2 entries

c) Prepare the amortization table for the lease. Round all amounts to the nearest dollar. Round-out the last year (any rounding difference will be added/subtracted from interest expense).

Date	Payment	Interest Expense	Reduction of Liability	Lease Liability
1/1/20
1/1/20
1/1/21
1/1/22
1/1/23

d) Prepare all Eubank Company required entries on December 31, 2020.