Question
W Company, as lessee, enters into a lease agreement on Jan 1, 2021, for equipment. The following data are relevant to the lease agreement:
W Company, as lessee, enters into a lease agreement on Jan 1, 2021, 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 Jan 1 of each year. 2. The fair value of the equipment on Jan 1, 2021 is $3,500,000. The equipment has an economic life of 5 years with no salvage value. 3. W depreciates similar machinery it owns using straight-line method. A 4. The lessee pays all executory costs. 5. W's 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) Is this lease a finance lease or operating lease for W? Why? (b) Which rate should W use to calculate the PV of the lease payments? (c) Assume that the present value of lease payment is $3,500,000. Calculate the interest expense reported on Dec 31, 2021 (d) Prepare the journal entries on W's books that relate to the lease agreement for the following dates: (Round all amounts to the nearest dollar.) 1. Prepare the entry to record the lease on its books on Jan 1, 2021. 2. Record the first year's lease payment (at commencement of the lease) on Jan 1, 2021. I 3. Record the first year's amortization on W's books on December 31, 2021 (assume straight-line). 4. Record the second year's lease payment on Jan 1, 2022. Note: Indicate Debit (Dr) and Credit (Cr) clearly in the journal entries,
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