P 152 Finance lease

LO152

At the beginning of 2021, VHF Industries acquired a machine with a fair value of $6,074,700 by signing a four-year lease. The lease is payable in four annual payments of $2 million at the end of each year.

Required:

What is the effective rate of interest implicit in the agreement?

Prepare the lessees journal entry at the beginning of the lease.

Prepare the journal entry to record the first lease payment at December 31, 2021.

Prepare the journal entry to record the second lease payment at December 31, 2022.

Suppose the fair value of the machine and the lessors implicit rate were unknown at the time of the lease, but that the lessees incremental borrowing rate of interest for notes of similar risk was 11%. Prepare the lessees entry at the beginning of the lease.

(Note: You may wish to compare your solution to P 152 with that of P 1412, which deals with a parallel situation in which the machine was acquired with an installment note.)