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Point 1. Eubank's incremental borrowing rate is 10% per year. The lessee is aware that the lessor used an implicit rate of 8% in computing the lease payments (present value factor for 4 periods at 8%, 3,57710; at 10%, 3,48685).
Point 2. The fair value of the equipment on July 1, 2018 is 3.500.000. The equipment has an economic life of 6 years with no salvage value.
Point 3. Eubank depreciates similar machinery it owns on the sum-of-the-years digits basis.
Point 4. The lessee pays all executory costs.
Instructions
Question a) Indicates the type of lease Eubank Company has entered into and what accounting treatment is applicable.
Question b) Prepare the journal entries on Eubank's book that relate to the lease agreement for the following dates: (Round all amounts to the nearest dollar. Include a partial amortization schedule).
1. July 1, 2018
2. December 31, 2018
3. July 1, 2019
4. December 31, 2019
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