On December 31, 2024, Burke Corporation signed a 5-year, non-cancelable 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 December 31, 2024. 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. Burke uses the straightline method of depreciation for all of its plant assets. Burke’s incremental borrowing rate is 5%, and the lessor’s implicit rate is unknown.

Instructions

a. What type of lease is this? Explain.

b. Compute the present value of the lease payments.

c. Prepare all necessary journal entries for Burke for this lease through December 31, 2025.