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Problem 1 Eubank Company, as lessee, enters into a lease agreement on July 1, 2018, for equipment. The following data are relevant to the lease
Problem 1 Eubank Company, as lessee, enters into a lease agreement on July 1, 2018, for equipment. The following data are relevant to the lease agreement: 1. The term of the noncancelable lease is 4 years. Payments of $978,446 are due on July 1 of each year. The equipment reverts to lessor at the termination of the lease. 2. The fair value of the equipment on July 1, 2018 is $3,500,000. The equipment has an economic life of 6 years. 3. Eubank depreciates similar machinery it owns on the straight-line basis. 4. Eubank's incremental borrowing rate is 10% per year. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease payments (present value factor for 4 periods at 8%, 3.57710; at 10%, 3.48685). (a) Indicate the type of lease Eubank Company has entered into. (b) Prepare the journal entries on Eubank's books that relate to the lease agreement for the following dates: (Round all amounts to the nearest dollar. ) 1. July 1, 2018. 2. December 31, 2018
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