LEASE ONE In January 2019, Alsace Company leased equipment with a fair value of $2,500,000 from Lorraine Corp. Lorraine estimates that the residual value of the equipment at the end of the lease term will be $750,000. Alsace is required to apply ASC 842 when accounting for the lease.

The leasing contract includes the following terms:

I. Alsace will make 10 end-of-year payments of $300,000 each beginning on December 31, 2019.

II. Alsace will have complete control of the equipment until it is returned to Lorraine on January 1, 2029.

Required:

1. Calculate the following (using EXCEL):

A. The implicit interest rate.

B The present value of the lease payments.

2. Complete each of the four following lease clauses any of which, if included in the lease contract, would require treating the lease as a finance lease:

a. ______________ is transferred to Alsace at the end of the lease term.

b. Alsace may ______________ the equipment for $200,000.

c. The _________________________ of the equipment is 12 years.

d. The equipment was ___________________ for Alsace.

LEASE TWO In January 2019, Alsace Company leased equipment with a fair value of $2,500,000 from Lorraine Corp. Lorraine estimates that the residual value of the equipment at the end of the lease term will be $750,000. The lease has a useful life of fifteen years. Alsace is required to apply ASC 842 when accounting for the lease.

The leasing contract includes the following terms:

I. Alsace will make 10 end-of-year payments of $300,000 each beginning on December 31, 2019.

II. Alsace will have complete control of the equipment until it is returned to Lorraine on January 1, 2029.

III. Alsace guarantees $400,000 of residual value on January 1, 2029.

Required:

1. Calculate (using EXCEL) the present value of the lease payments.

2. Present appropriate journal entries to be made by Alsace:

a. at the commencement of the lease on January 1, 2019.

b. when the initial lease payment is made on December 31, 2019.