On Jan1, 2008, Burke Corp. signed a 5-year noncancelable lease for a machine. The terms of the lease called for Burke to make annual payments of $8,668 at the beginning of each year, starting Jan. 1, 2008. The machine has an estimataed useful life of 6 years. The machine reverts back to lessor at the end of the lease term. Burke uses the straight-line method of depreciation for all its plant assets. Burke's incremental borrowing rate is 10% and the Lessor's implicit rate is unknown.
Instructions:
1. What type of lease is this? Explain.
2. Compute the present value of the minimum lease payments.
3. Prepare all necessary journal entries for Burk for this lease through Jan. 1, 2009.