On January 1, 20X1, Beard Company purchased a machine for $620,000. The machine is expected to have a 10-year life, with no salvage value, and will be depreciated by the straightline method. On January 1, 20X1, it leased the machine to Child Company for a 3-year period at an annual rental of $128,000 to be paid at the end of each year. Beard could have sold the machine for $817,298 instead of leasing it. Child does not know the implicit rate in the lease, but it has an incremental rate of 9%. Child Company has a December 31 reporting year.

Required:

1. Why is this an operating lease for Child Company? Explain.

2. What are the amounts of the right-of-use asset and lease liability that Child Company should report on its balance sheet at December 31, 20X1?

3. How much lease expense should Child Company recognize in 20X1?