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Question - On January 1, 2018, Southern, Inc. signed a 10-year non-cancelable lease for a machine. The terms of the lease called for Southern to make annual payments of $17,240 at the beginning of each year, starting January 1, 2018. The machine has an estimated useful life of 12 years.
The machine reverts back to the lessor at the end of the lease term. Southern uses the straight-line method of depreciation for all of its plant assets. Southern's incremental borrowing rate is 4%, and the Lessor's implicit rate is unknown.
Required -
1. Identify and explain the type of lease. Use the blank area in the template following the journal entries to make your notes.
2. Compute the present value of the minimum lease payments.
3. Prepare all necessary journal entries for Southern for this lease through January 1, 2019.Where appropriate, show all calculations leading to the final solution.
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