1. On January 1, 2014, P & P Products entered into an agreement to lease a piece of equipment from Beta Company, Inc. (the lessor). The lease term is five years and the interest rate is 8 percent. The first payment is made on January 1, 2014. The machine has a fair value of $600,000, a useful life of six years and no residual value. P & P Products does not know the interest rate that Beta uses. Assume that the entries have not yet been made on the books of P & P Products.
Required: Make the original lease entry(ies) on January 1, 2014
2. Delta Company sells high-end laser printers for $5,000 each. They also offer the option to lease the printers for five years. The computers cost Delta $3,500 to manufacture. On January 1, 2014, Delta leased 10 computers to P & P, and required that the first payment be made at that time. At the end of the lease term, the printers will be returned to Delta. Although the printers will be considered obsolete at the end of the lease, they will still be worth something at that time. Delta wants to recover the full sales price, plus 9 percent interest, over the five-year term of the lease. Assume that, for this lease, P & P’s incremental borrowing rate is 16 percent, and it is unaware of Delta’s implicit interest rate. P & P assumes the printers will last 5 years.
Required: 1-Determine the amount of the lease payments, as determined by Delta.
2-Provide the entries required on Delta’s books to record the lease and the first payment.
3-Compute the total income to be recognized by Delta Company in the first year of the lease