Question One: (15 marks) (B1, C2)

Ahlia Company, as lessee, enters into a lease agreement on July 1, 2017, for equipment. The following data are relevant to the lease agreement:

1. The term of the noncancelable lease is 5 years, with no renewal option. Payments of $500,000 are due on June 30 of each year.

2. The fair value of the equipment on July 1, 2017, is $1,699,635. The equipment has an economic life of 8 years with no salvage value.

3. Ahlia depreciates similar machinery it owns on the straight-line method.

4. The lessee pays all executory costs.

5. Ahlias incremental borrowing rate is 10% per year. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease payments (present value factor for 5 periods at 8%, 3.399270; at 10%, 3.79079.)

Instructions

(a) Indicate the type of lease Ahlia Company has entered into and what accounting treatment is applicable. (3 marks)

(b) Prepare the journal entries on Ahlia's books that relate to the lease agreement for the following dates: (Round all amounts to the nearest dollar. Include a partial amortization schedule.) (12 marks)

1. July 1, 2017.
2. December 31, 2017.
3. June 30, 2018.
4. December 31, 2018.
5. June 30,2019.