Please Answer the Questions based on the following information.

On 1/1/18 a lease was agreed upon. The lease term is 4 years; is non-cancellable; and requires equal lease payments of $61,000 at the beginning of each year. The lessees incremental borrowing rate is 6% and the lessors sets the annual return on leased assets to 5%. The lessee is aware of the lessors established annual return (this is their implicit rate of return although the text wasnt clear on this issue). The fair market value of the leased asset is $227,500 and has a useful life of 4 years with no expected economic value at the end of the lease. Thus, the lease has no guaranteed or non-guaranteed residual value for the asset. The lease does not contain any renewal option and the asset reverts to the lessor at the end of the term. The lessee depreciates similar equipment that it owns on a straight-line basis.

1. Calculate recovery of investment using Present Value Test (90%)

2. Record journal entry for the lease on 1/1/18 Right to Use Asset xxxx Lease Liability xxxx

3. Record journal entry for the first lease payment on 1/1/18

4. Record the Interest Expense Journal Entry made on 12.31/18

5. Record the Lease payment on 1/1/19

6. Record the Lease payoff entry on 1/1/22 assuming the asset was returned to the lessor.

7. Provide the balance sheet and income statement presentation for the lessee related to the lease reported on 12/31/18

Test 1. Transfer of ownership Assessment Transfer of ownership does not occur, the asset reverts to Caterpillar at the end of the lease, 2. Purchase option test There is no purchase option in the lease. 3. Lease term test The lease term is equal to the economic life of the asset (100 percent). Therefore, the lease meets the lease term test 4. Present value test The present value of the lease payments is $100,000", which is 100 percent (greater than or equal to 90 percent) of the fair value of the backhoe. Therefore, the lease meets the present value test 5. Alternative use test Since the asset is returned to Caterpillar with some residual value, the alternative use test is not met Present value of payments ($20,711.11 4.62900 (PVF AD...) $ 95,000 35 Present value of the residual value ($5,000 - 82193 (PVF ]) 4 109.65 $1000000 LUSTRATIONAL Calienthon Test Test 1. Transfer of ownership Assessment Transfer of ownership does not occur, the asset reverts to Caterpillar at the end of the lease, 2. Purchase option test There is no purchase option in the lease. 3. Lease term test The lease term is equal to the economic life of the asset (100 percent). Therefore, the lease meets the lease term test 4. Present value test The present value of the lease payments is $100,000", which is 100 percent (greater than or equal to 90 percent) of the fair value of the backhoe. Therefore, the lease meets the present value test 5. Alternative use test Since the asset is returned to Caterpillar with some residual value, the alternative use test is not met Present value of payments ($20,711.11 4.62900 (PVF AD...) $ 95,000 35 Present value of the residual value ($5,000 - 82193 (PVF ]) 4 109.65 $1000000 LUSTRATIONAL Calienthon Test