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

Zain Company, as lessee, enters into a lease agreement on August 1, 2018, for equipment. The following data are relevant to the lease agreement:

1. The term of the noncancelable lease is 4 years. Payments of 978,446 are due on August 1 of each year.

2. The fair value of the equipment on August 1, 2018, is 3,500,000. The equipment has an economic life of 6 years with no salvage value.

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

5. Zains 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 4 periods at 8%, 3.57710: at 10%, 3.48685).

Instructions

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

(b) Prepare the journal entries on Zains 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. August 1, 2018.

2. December 31, 2018.

3. August 1, 2019.

4. December 31, 2019.