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Calculate the present value of the minimum lease payments

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On January 1, 2020, Donald Corp. enters into a ten-year non-cancellable lease with Mickey Ltd. for equipment having an estimated useful life of 11 years and a fair value of $ 6,000,000. Donald's incremental borrowing rate is 8%, but they do not know Mickey' implicit rate. Donald uses the straight-line method to depreciate assets.

The lease contains the following provisions:

1. Semi-annual lease payments of $438,000 (including $38,000 for maintenance), payable on January 1 and July 1 of each year.

2. A guarantee by Donald Corp. that Mickey Ltd. will realize $ 200,000 from selling the asset at the expiration of the lease.

Both companies report under ASPE. Both companies have year end of December 31.

Required:

Problem 1: Calculate the present value of the minimum lease payments. Round to the nearest dollar. 

Problem 2: What kind of lease is this to Donald Corp.? Why?

Problem 3: Present the journal entries that Donald would record on January 1, 2020 and December 31, 2020. Include an amortization schedule through January 1, 2021 and round values to the nearest dollar.

Problem 4: Assume that at the end of lease term on January 1, 2030, the fair value of the equipment was $183,000. Record the required journal entries on the books of Donald and Mickey.

Reference no: EM132864769

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