On June 30, 2019, Blue, Inc. leased a machine with a 5-year useful life from Large Leasing Corporation. The lease agreement calls for Blue to make semiannual lease payment over a four-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2019. Blues incremental borrowing rate is 12%, and Larges implicit rate is 10% (unknown to Blue). Large depreciates their assets on a straight-line basis at the end of each fiscal year. Large constructed the machine at a cost of $1,400,000. The fair value of the machine is $1.8 million, and Large provided Blue the option to purchase the machine at a discounted amount of $45,000 at the end of the lease. Both companies use a 31-Dec year end.

Instructions

For Large Leasing Co.

a. What the of lease is this for Large?

b. Calculate the annual lease payments required by Large (given Larges implicit rate of return) in order to recover the fair value of the machine.

C. Provided the journal entries through June 30, 2020

For Blue, Inc

a. What type of lease is this Jackson?

B. Calculate the present value of else payments for Jackson

c. Provided the journal entries through June 30, 2020