At the beginning of 2013, VHF Industries acquired a machine with a fair value of $6,074,700 by signing a fouryear lease. The lease is payable in four annual payments of $2 million at the end of each year.
1. What is the effective rate of interest implicit in the agreement?
2. Prepare the lessee’s journal entry at the inception of the lease.
3. Prepare the journal entry to record the first lease payment at December 31, 2013.
4. Prepare the journal entry to record the second lease payment at December 31, 2014.
5. Suppose the fair value of the machine and the lessor’s implicit rate were unknown at the time of the lease, but that the lessee’s incremental borrowing rate of interest for notes of similar risk was 11%. Prepare the lessee’s entry at the inception of the lease.