Problem #2

A company signs a lease on January 1, Year One, to lease a machine for eight years. Payments are $10,000 per year with the first payment made at the beginning of the year. The company has an incremental borrowing rate of 10 percent and the lease is considered as a capital lease. Assume the present value of an annuity due of $1 for eight periods at an annual interest rate of 10 percent is 5.335. Ensure to show work for all calculations. Prepare the following journal entries for the company. Record the signing of the lease on January 1, Year One. Record the first payment on January 1, Year One. Record depreciation on the equipment on December 31, Year One. Record interest on the liability on December 31, Year One. Record the second payment on January 1, Year Two.