Chapter 15, Problem 15.2P

Finance lease

• LO15–2

At the beginning of 2018, VHF Industries acquired a machine with a fair value of $6,074,700 by signing a four-year lease. The lease is payable in four annual payments of $2 million at the end of each year.

Required:

1. What is the effective rate of interest implicit in the agreement?

2. Prepare the lessee’s journal entry at the beginning of the lease.

3. Prepare the journal entry to record the first lease payment at December 31, 2018.

4. Prepare the journal entry to record the second lease payment at December 31, 2019.

5. Suppose the fair value of the machine and the lessor’s implicit rate were unknown at the time of the lease, but that the lessee’s incremental borrowing rate of interest for notes of similar risk was 11%. Prepare the lessee’s entry at the beginning of the lease.

(Note: You may wish to compare your solution to Problem 15–2 with that of Problem 14–12, which deals with a parallel situation in which the machine was acquired with an installment note.)