MOU Leasing Company agrees to lease machinery to YOU Corporation on January 1, 2019. The following information relates to the lease agreement.

1. The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.

2. The cost of the machinery is $1,050,000, and the fair value of the asset on January 1, 2019, is $1,400,000.

3. At the end of the lease term, the asset reverts to the lessor and has a quaranteed residual value of $100,000. YOU estimates that the expected residual value at the end of the lease term will be $100,000. YOU depreciates all of its equipment on a straight-line basis.

4. The lease agreement requires equal annual rental payments, beginning on January 1, 2019.

5. MOU desires a 5% rate of return on its investments. YOUs incremental borrowing rate is 6%, and it is impracticable to determine the lessors implicit rate.

Required: (Assume the accounting period ends on December 31)

a. Explain how long YOU will depreciate the asset! Why?

b. Explain which rate will be used by MOU to calculate the annual rental payment! Why?

c. Explain which rate will be used by YOU to calculate the lease liability! Why?

d. Calculate the amount of the annual rental payment required!

e. Compute the value of the lease liability to the lessee!

f. Prepare the journal entries YOU would make in 2019 and 2020 related to the lease arrangement!

g. Prepare the journal entries MOU would make in 2019 and 2020 related to the lease arrangement and explain the journal that you make!