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Question - Mason Company has a machine with a cost and fair value of $100,000. On January 1, 20X1, it leases the machine for a 10-year period to Drake Company. The machine has a 12-year expected economic life. Payments are received at the beginning of each year. The machine is expected to have a $10,000 residual value at the end of the lease term. Drake does not guarantee the residual value.
Required -
1. What would the lease payments be if Mason wants to earn a 10% return on its net investment?
2. What lease obligation would Drake report when the lease is signed?
3. What would be the interest revenue reported by Mason and the interest expense reported by Drake in the first year, assuming they both use the 10% discount rate?
4. How would the answers to requirements 2 and 3 change for Drake if it guaranteed the residual value?
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