Reference no: EM132833749
Question - Lehman Dairy leases its milking equipment from Chavez Finance Company under the following lease terms.
1. The lease term is 10 years, noncancelable, and requires equal rental payments due at the beginning of each year starting January 1, 2020.
2. The equipment has a fair value of $415,000, and cost Chavez $325,000 at the inception of the lease (January 1, 2020).
3. The estimated economic life of the equipment is 10 years, and a residual value (which is guaranteed by Lehman Dairy) of $20,700 (no additional payment is expected).
4. The lease contains no renewable options, and the equipment reverts to Chavez Finance Company upon termination of the lease.
5. Lehman Dairy's incremental borrowing rate is 10% per year. The Chavez's implicit rate is 8% and is unknown to Lehman Dairy.
6. Collectability of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor.
Required -
1. What is the PV of the Lease?
2. What is the Annual Payment of the Lease?
3. What is the PV of the Residual value?
4. Make Journal entries for first two years for the Lessee and Lessor.
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