Question

ABC enters into 2 leases for 2 machines. Machine 1 is leased from DEF Capital, and provides ABC a 5 year lease on January 1 good for 5 years (that machine has an expected life of 10 years , no residual) for $1,000 month. The fair market value of the machine is $100,000. This lease is non-cancellable and first payment is due 1/1/2015. ABC's incremental borrowing rate is 10%. GHI operating leases ABC machine also a non-cancellable term of 5 years (estimated useful life of machineis 5 years) with the first lease payment of $2,084 (due each month) also due on 1/1/15. Machine 2 has a FV of $100,000. The leasing cpmpanies pays all of the executor costs directly except property tax. The property tax is $2,000/year for each machine.

Prepare journal entries

Answer 1