On January 1, 2019 Walgreens entered into a non-cancellable lease agreement with Pharmaceutical Equipment, Inc. (PE) for the lease of specialized laboratory equipment designed to draw blood to perform healthtests for their customers. The lease agreement requires WAG to make beginning of the year payments for the 5-year term of the lease. The fair value of the equipment at lease inception is $25,418,156. WAG guarantees to PE that the residual value of the equipment at the end of the term of the lease will be $2,500,000. However, given that the equipment is heavily used by WAG it has an expected residual value at the end of the lease of $2,250,000.

The useful life of the equipment is 10 years with a salvage value to PE of $2,500,000. Both PE and WAG use the straight-line method of depreciation (or amortization) for their equipment and right of use assets. The lease contract includes a written option that would give WAG the optionto purchase the underlying equipment for a price of $3,500,000.

Collectability of lease payments is reasonably predictable.

PE's implicit rate of return of 8% is known to WAG and WAG's incremental borrowing rate is 10%.

1.What would be the amount to be recovered by the lessor (PE) through equal lease payments? Please exclude any decimals, commas or dollar signs from your response.

2.From the perspective of the lessee, which criteria for classifying a lease as a finance lease were met?

a.Written Bargain purchase option, Net Present Value and Specialized Nature test.

b.Net Present Value only.

c.Net Present Value andSpecialized Nature test.

d.Economic life and Net Present Value.

e.None of the options is the correct answer.

3.Using the account names per Ch.21A power point slides,netting the effect of both transactions noted below and excluding any commas or $:

What would be the journal entry that WAG needs to post to their general ledger to recognize the lease inception and first payment on January 1, 2019?

WAG needs to record a debit of $[1]to the account[2], a credit of $[3]to the account[4]and a credit of $[5]to the account[6].

4.Amortization expense recorded by WAG in each year would be calculated as:

a.Operating leases do not have amortization expense.

b.The initial book value of the right-of-use asset divided by 5years.

c.The initial book valueof the right-of-use asset divided by 10 years.

d.Theinitial book value of the right-of-use asset minus the $500,000 salvage value divided by 10 years.

e.The initial book value of the right-of-use asset minus the $500,000 salvage value divided by 5 years.

5.Which of the following statements would be true if the Written Purchase Option allowed WAG to acquire the laboratory equipment for $850,000 rather than $3,500,000?

a.All of the above are true.

b.The lessee, WAG, would amortize the asset overthe useful life of the asset.

c.The lessee, WAG, would amortize the asset over the term of the lease.

d.The lease liability measured and recorded at inception of the lease would be lower.

e.After the last payment of $2,500,000 the lease liability will be equal to zero.

6.If theresidual value of the equipment at the end of the term of the lease wasNOTguaranteed by the lessee and instead was guaranteed by a third party:

a.The lease liability measured and recorded at inception of the lease by WAG would be lower.

b.PE would include the third-party guaranteed residual value in the measurement of their Lease Receivable.

c.For purposes of the classification tests, WAG would exclude the third-party guaranteed residual value from their present value test.

d.For purposes of the classification tests, PE would include the third-party guaranteed residual value in their present value test.

e.All of the above are true.