On September 1, 2020, Wong Corporation, which uses ASPE, signed a five-year, non-cancellable lease for a piece of equipment. The terms of the lease called for Wong to make annual payments of $13,668 at the beginning of each lease year, starting September 1, 2020. The equipment has an estimated useful life of seven years and a $9,000 unguaranteed residual value and a fair value on September 1, 2020, of $79,000. The equipment reverts back to the lessor at the end of the lease term. Wong uses the straight-line method of depreciation for all of its plant assets, has a calendar year end, prepares adjusting journal entries at the end of the fiscal year, and does not use reversing entries. Wongs incremental borrowing rate is 10%, and the lessors implicit rate is unknown.

Instructions

a. Calculate the PV of the future minimum lease payments using any of the following methods: (1) factor tables, (2) a financial calculator, or (3) Excel functions. Round to the nearest dollar.

b. Explain why this lease is considered an operating lease.

c. Prepare all necessary journal entries for Wong Corporation for this lease, including any year-end adjusting entries through December 31, 2021. Round to the nearest dollar.