On January $1,1999$ C Company signs a $4-$year noncancelable lease agreement to lease a machine to $P$

Company. The following data pertain to this agreement.

You will be required to show your calculations on the exam.

a$.$ Payments of $$89,471\mathrm{.}26$ are due on Dec. $31$ of each year. The first payment in advance is paid on Jan. $12001$

b$.$ The fair value and the cost of the machine to C Company on Jan $1,2001$ is $$335,000.$

P Company has the BARGAIN PURCHASE OPTION to purchase the machine for $$16,000$ upon the end of the lease.

c$.$ P and C company use the straight$-$line method to depreciate equipment which in this case has a $4$ year economic

life. If not exercised the machine reverts back to the lessor at the end of the lease.

d$.$ C$\text{'}$s implicit rate is $10\%$ and the salvage value is $$16,000$ and is guaranteed by lessee.

Instructions:

Is this a capital lease or operating lease? Show results for each of $4$ capitalization tests.

Instructions: Prepare journal entries on the books of the lessee through $12/31/02$

The accounting period of $C$ ends on December $31.$