PROBLEM:

On January 1, 2019 Day Co. leased a new machine from Parr with the following pertinent information:

Lease term 6 years

Annual rental payable at the beginning of each year $50,000

Useful life of machine 8 years

Days incremental borrowing rate 15%

Implicit interest rate in lease (known by Day) 12%

Present value of annuity of 1 in advance for 6 periods at

12% 4.61

15% 4.35

The lease passes ownership of the machine to Day at the termination of the lease. The cost of the machine on Parrs accounting record is $375,500.

Hint: see bottom of pages 839 - 841 (chapter 15) of your text book for an illustrative example. Please write your answers in the space provided in each question.

QUESTIONS:

1. At the beginning of the lease term, Day should record a lease liability of

1. $375,500
2. $230,500
3. $217,500
4. $0

2. Is this a capital or operating lease?

3. Record/Journalize the entry Day should make at the inception/beginning of the lease Jan 1, 2019

4. Record/journalize Days annual lease payment at end of 2019

5. Record/journalize Days annual interest payment at end of 2019 (use the effective interest rate method)

6. How much is Days lease liability at the end of 2019.