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DENMET, Inc. is going to introduce a new product. A factory building was built to install a new production line. The production facilities should be operational by January 1, 2019. In the factory building $800,000 has been invested in technical installations, which are essential for the production line. The new product is protected by a patent for the next 5 years. It will be manufactured on machines provided and sold by Maskiner, Inc. in Ringsted. Maskiner also owns of the patent for the product. DENMET pays a licensing fee of $750,000 for the right to manufacture and sell the product. The cost (purchase price) of the machines is $3.4 million. The cost of having them delivered is $85,000. The cost of installation, which is completed in December 2018, is $177,000. Trial runs including the on-site training of the operators costs $153,000 and the training of the operators at the manufacturing site in Ringsted costs $185,000. On January 1, the production line is ready for use. Maintenance costs on the production line amounted to $150,000 in January. DENMET lists Land and Buildings and Equipment and Technical Installations under Property, Plant, and Equipment. Buildings have an estimated useful life of 50 years; technical installations and machinery (equipment), of 10 years. DENMET applies straight-line depreciation to all Property, Plant, and Equipment. The salvage value is expected to be $0. Ignore tax considerations. B-1. How would you account for the $750,000 licensing fee that DENMET pays? List any assumptions you make in answering the question. B-2. At what value is the production line listed on DENMET's balance sheet (a) on December 31, 2018; (b) on December 31, 2019? Now consider the situation in December 2018. Assume DENMET does not have enough funds to outright buy the machines. Instead, DENMET enters into an 8-year lease agreement with Maskiner Inc. after 8 years, DENMET Inc. has the option of buying the machines at a price of $1. The annual lease payment is $569,390.39 and is paid on the last banking day in December - payments are scheduled to commence in December 2019. The interest rate implicit in the lease (the internal rate of return) is 7%. Note that DENMET must pay for the transportation, installation, trial runs, and employee training also when the machines are leased. B-3. How does the lease impact DENMET's balance sheet and income statement in 2018 and in 2019? Indicate items and amounts. State any assumptions that you make. Hint: Liabilities related to capital leases are amortized like the premium on a bond. (Interest expense consists of interest payment and amortization of the lease liability; no contra-liability account is needed.)