Problem: On December 31, 2019, Metlock Corporation signed a 5-year, non-cancelable lease for a machine. The terms of the lease called for Metlock to make annual payments of $8,176 at the beginning of each year, starting December 31, 2019. The machine has an estimated useful life of 6 years and a $5,000 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Metlock uses the straight-line method of depreciation for all of its plant assets. Metlock's incremental borrowing rate is 8%, and the lessor's implicit rate is unknown.
Required:
What type of lease is this?
Compute the present value of the lease payments?
Prepare all necessary journal entries for this lease through December 31, 2020.
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