Question

Please answer all a,b,c!

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

The term of the non-cancelable lease is 4 years with no renewal option. Payments of $782,757 are made at the beginning of each year. The present value of the minimum lease payments equals $2,800,000.

The fair value of the equipment on 1/1/18 is $2,800,000. The equipment has an economic life of 4 years with no salvage value and reverts to the lessor at lease conclusion.

Eubank depreciates similar machinery it owns on a straight-line basis annually.

The lessor pays all executory costs.

Eubank is aware the lessor used an implicit rate of 8% in computing the lease payments.

a. Record all journal entries for Eubank that would occur on 1/1/2018

b. Record all journal entries for Eubank that would occur on 12/31/2018

Juno Corp., as lessee, initiates a capitalized lease for equipment with a fair value of $110,000. The lease is non-cancelable with a term of 10 years and no renewal option. Lease payments of $16,000 are paid annually at the beginning of each year. The estimated residual value after 10 years is

$10,000. Ownership reverts to the lessor after the lease term, and Juno Corp. guarantees the residual value of the equipment. The estimated economic life of the equipment is 12 years. Juno’s incremental borrowing rate is 10% a year. The lessor’s implicit rate is unknown.

c. What is the present value of the minimum lease payments for Juno? (show your work)

Answer 1