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

The lease term is 8 years, noncancelable, and requires equal rental payments due at the beginning of each year starting January 1, 2022

The equipment has a fair value of $410,000 & cost Chavez $280,000, at the inception of the lease (January 1, 2022)

Lehman Dairy has the option to purchase the equipment for $8,000. 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 $19,000. If the purchase options is not exercised, Lehman Dairy expects to pay $10,000 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 9% per year. Chavez's implicit rate is 7% 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 7% 0.58201

Present value of 1 for 8 periods at 9% 0.50187

Present value of an ordinary annuity for 8 periods at 7% 5.97130

Present value of an ordinary annuity for 8 periods at 9% 5.53482

Present value of annuity due for 8 periods at 7% 6.38929

Present value of annuity due for 8 periods at 9% 6.03295

Instructions

(Assume the accounting period ends on December 31.)

Calculate the required payment Chavez Finance requires to earn the Fair Value of the asset.

Lehman Dairy is able to negotiate the payment down to $62,000 per year. Compute the present value of the minimum lease payment for both the lessee and lessor

What type of lease is this for the lessee? For the lessor?

Prepare the journal entries Chavez would make in 2023 related to the lease arrangement.

Prepare the journal entries Lehman would make in 2023 related to the lease arrangement.