Part 3: Lessee Entries: Capital Lease

On January 1, 2018, Southern, Inc. signed a 10-year non-cancelable lease for a machine. The terms of the lease called for Southern to make annual payments of $17,240 at the beginning of each year, starting January 1, 2018. The machine has an estimated useful life of 12 years.

The machine reverts back to the lessor at the end of the lease term. Southern uses the straight-line method of depreciation for all of its plant assets. Southerns incremental borrowing rate is 4%, and the Lessors implicit rate is unknown.

• Identify and explain the type of lease. Use the blank area in the template following the journal entries to make your notes.
• Compute the present value of the minimum lease payments.