Q1) On January 1, 2007, Burke Corporation signed 5-year non-cancellable lease for machine. Terms of lease called for Burke to make annual payments of $8,668 at starting of each year, starting January 1, 2007. Machine has estimated useful life of 6 years and $5,000 unguaranteed residual value. Machine reverts back to lesser at the end of lease term. Burke uses straight-line method of depreciation for all of its plant assets. Burke's incremental borrowing rate is 10%, and lessee's implicit rate is unknown.
Instructions
a. What kind of lease is this? Describe.
b. Calculate present value of minimum lease payments.
Create all essential journal entries for Burke for this lease through January 1, 2008.