On January 1, 20X1 Gold Inc. leased some new equipment for a term of 10 years. The equipments expected life is 12 years (salvage value = 0) and it has a fair market value of $1,500,000. The lease arrangement has no transfer of ownership, but does have a bargain purchase option for $50,000 that Gold will likely exercise. The contract requires annual lease payments (beginning of year payments) of $160,000. The incremental borrowing rate for Gold Inc. is 5% and the lessors implicit rate of interest is 3%.

1. Record the journal entries (accounts and amounts) Gold Inc. would make on January 1, 20X1. Hint: dont forget the 1^st payment on January 1, 20X1. (4 points)

2. On January 1, 20X1 Black Corp. enters into a lease contract. The lease arrangement is for 5 years, has a bargain purchase option, but no residual value guarantee. The expected useful life of the asset is 6 years and it has a salvage value of $10,000. The initial value of the lease asset (and liability) is $610,000. Lease payments are end-of-year payments of $117,239. Blacks incremental borrowing rate is 5% and the implicit rate for this lease is unknown. Record the journal entries (accounts and amounts) for this lease arrangement related to the lease liability that would be made on December 31, 20X1 (4 points).

3. Record the journal entry (accounts and amounts) related to the lease asset (in question (c) above) that would be made on December 31, 20X1 (4 points). Hint: think depreciation expense.

4. Suppose Gold Inc. has large amounts of historical operating leases under the old rules. Briefly describe how capitalizing the operating leases under the new rules will affect their balance sheet (2 points).

5. Ignoring any income statement effects, what is the impact to Gold Inc.s return on assets (ROA) (2 points) from capitalizing the leases (e.g. increase, decrease, or no effect)?

6. Ignoring any income statement effects, what is the impact to Gold Inc.s ) long-term debt to asset ratio (2 points) from capitalizing the leases (e.g. increase, decrease, or no effect)?