Problem 15-2 Finance lease [LO15-2]

At the beginning of 2018, VHF Industries acquired a machine with a fair value of $9,415,785 by signing a four-year lease. The lease is payable in four annual payments of $3.1 million at the end of each year. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. What is the effective rate of interest implicit in the agreement? 2-4. Prepare the lessees journal entries at the beginning of the lease, the first lease payment at December 31, 2018 and the second lease payment at December 31, 2019. 5. 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.