Question Six:

(10 marks) On March 31, 2020, Ahlam Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Ahlam to make annual payments of $10,485 starting April 1, 2021. The machine has an estimated useful life of 6 years. Ahlam uses the straight-line method of depreciation for all of its plant assets. Ahlams 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%, 3.993; at 10%, 3.791).

Instructions

a. What type of lease is this? Explain. (1 mark)

b. Compute the present value of the minimum lease payments.

c. Prepare all necessary journal entries for Ahlam for this lease through December31, 2021. (Round all amounts to the nearest dollar. Include a partial amortization schedule.)