Problem $8$

Lease $-$ Guaranteed Salvage Value

On January $1,1999$ M Company signs a $6-$year noncancelable lease agreement to lease a machine to B

Company. The following data pertain to this agreement.

$3$ Payments of $$81,365$ are due on Dec. $31$ of each year. First payment in advance is paid on Jan. $1,1999.$

b$.$ The fair value and the cost of the machine to C Company on Jan $1,1999$ is $$425,000.$

c$.M$ and $B$ company use the straight$-$line method to depreciate equipment.

d$.$ B$\text{'}$s implicit rate is $12\%$ and the salvage value is $$50,000$ and is guaranteed by lessee.

Instructions

Is this a capital lease or operating lease? Show results for each of $4$ capitalization tests.

Instructions: Prepare journal entries on the books of the lessee through $1999$ and $2000.$

The accounting period of $B$ ends on December $31.$