Problem 4 (35 points) Darien Company (lessor) signs an agreement on January 1, 2017, to lease boating equipment to Aztec, Inc. The following information details the lease agreement. 1. The term of the non-cancellable lease is 6 years with no renewal option. The equipment has an estimated economic life of 9 years. 2. The fair value of the asset at January 1, 2017, is $400,000. 3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $50,000, which is guaranteed by Aztec. 4. The agreement requires equal annual rental payments of $73,806 to the lessor, beginning on January 1, 2017 5. The lessee's incremental borrowing rate is 12%. The lessor's implicit rate is 8% and is known to the lessee. 6. Aztec uses the straight-line amortization method for all equipment n The present value factor of a single sum of $1, n periods & i % (PVER1): 8% 12% 6 0.63017 0.50663 9 0.50025 0.36061 n The present value factor an annuity due of $1 per period, n periods & i %, (PVF-ADa i): 8% 12% 6 4.99271 4.60478 9 6.74664 5.96764 Required: a) Explain how the lessor determined the annual lease payment (use words & numbers). (b) Determine whether this lease is a finance lease for the lessee. Explain. State whether it is a finance lease or operating lease. (c) Complete the Lessee's amortization schedule. Only shaded boxes will be graded, so you do not need to complete the unshaded boxes unless they are helpful. Date Lease Interest expense Change in Lease Lease Liability Payment Liability 1/1/2017 1/1/2017 12/31/2017 1/1/2018 12/31/2018 1/1/2019 12/31/2019 1/1/2020 12/31/2020 1/1/2021 12/31/2021 1/1/2022 12/31/2022 (d) Prepare all of the journal entries for the lessee for 2017 Account names include Cash, Right of Use Asset, Interest Receivable, Lease Receivable, Interest Payable, Lease Liability, Sales, Interest Revenue, Cost of Goods Sold, Amortization Expense, Interest Expense, Lease Expense, Loss on Finance Lease, Gain on Finance Lease. You do not have to use all account names. Date Account name Dr. Cr