Question Six: (10 marks)

On January 1, 2020, Ahlia Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Ahlia to make annual payments of $9,968 at the beginning of each year, starting January 1, 2020. The machine has an estimated useful life of 6 years and a $5,000 unguaranteed residual value. Ahlia uses the straight-line method of depreciation for all of its plant assets. Ahlias incremental borrowing rate is 8%. The lessee is aware that the lessor used an implicit rate of 10% in computing the lease payments (present value factor for 5 periods at 8%, 4.31213; at 10%, 4.16986).

Instructions

1. What type of lease is this? Explain. (1 mark)
2. Compute the present value of the minimum lease payments. (2 marks)
3. Prepare all necessary journal entries for Adams for this lease through January 1, 2021. (7 marks)