Lehman Dairy leases its milking equipment from Chavez Finance Company under the following lease terms.

The lease term is $8$ years, non$-$cancelable, and requires equal rental payments due at the beginning of each year starting January $1,2024.$

The equipment has a fair value of $$525,000,$ and cost Chavez $$435,000,$ at the inception of the lease $($January $1,2024).$

Lehman Dairy has the option to purchase the equipment for $$9,000.$ This represents a significant discount on the equipment.

The estimated economic life of the equipment is $10$ years, and a residual value $($which is guaranteed by Lehman Dairy$)$ of $$20,700.$ If the purchase option is not exercised, Lehman Dairy expects to pay $$12,000$ under the guaranteed residual value.

The lease contains no renewable options, and the equipment reverts to Chavez Finance Company upon termination of the lease, if the purchase option is not exercised.

Lehman Dairy$$s incremental borrowing rate is $8\%$ per year. Chavez$$s implicit rate is $6\%$ and is known to Lehman Dairy.

Collectability of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.

Present value of $1$ for $8$ periods at $6\%0\mathrm{.}62741$

Present value of $1$ for $8$ periods at $8\%0\mathrm{.}54027$

Present value of an ordinary annuity for $8$ periods at $6\%6\mathrm{.}20979$

Present value of an ordinary annuity for $8$ periods at $8\%5\mathrm{.}74664$

Present value of an annuity due for $8$ periods at $6\%6\mathrm{.}58238$

Present value of an annuity due for $8$ periods at $8\%6\mathrm{.}20637$

Instructions

$($Assume the accounting period ends on December $31.)$

$($a$)$ Calculate the required payment Chavez Finance requires to earn the Fair Value of the asset, using the LESSEE$$S Borrowing Rate?

$($b$)$ Lehman Dairy is able to negotiate the payment down to $$81,000$ per year. Compute the present value of the minimum lease payments for both the lessee and lessor.

$($c$)$ What type of lease is this for the lessor? For the lessee? Why?

$($d$)$ Prepare the journal entries Chavez would make in $2025$ related to the lease arrangement.

$($e$)$ Prepare the journal entries Lehman would make in $2025$ related to the lease arrangement.