Problem $9$ Lessee $-$ No Guaranteed Residual Value

Z Company enters into a lease agreement with F Co$.$ on Jan $1,1996,$ to lease a machine to be used in its

manufacturing operations. The following data pertain to this agreement.

a$.$ The term of the noncancelable lease is $3$ years, with no residual value at the end of the lease term.

Payments of $$102,356\mathrm{.}39$ are due on Dec. $31$ of each year. The first payment in advance is paid on Jan. $1,1996.$

b$.$ The fair value of the machine on Jan $1,1996$ is $$300,000.$ The machine has an economic life of $5$ years, with no

salvage value. The machine reverts to the lessor upon the termination of the lease.

c$.Z$ and $F$ company use the straight$-$line method to depreciate equipment.

d$.$ Z$\text{'}$s incremental borrowing rate is $10\%$ and the implicit rate is unknown.

Required:

Is this a capital lease or operating lease. Why?

Instructions: Prepare journal entries on the books of the lessee through the Life of the lease $..$

The accounting period of $Z$ and $F$ Company ends on December $31.$