Lehman Dairy leases its milking equipment from Chavez Finance Company under the following lease terms. The...

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Lehman Dairy leases its milking equipment from Chavez Finance Company under the following lease terms. The lease term is 12 years, non-cancelable, and requires equal rental payments due at the beginning of each year starting January 1, 2024. The equipment has a fair value of $727,500, and cost Chavez $485,000, at the inception of the lease (January 1, 2024). Lehman Dairy has the option to purchase the equipment for $9,000. This represents a significant discount on the equipment. The estimated economic life of the equipment is 14 years, and a residual value (which is guaranteed by Lehman Dairy) of $20,000. If the purchase option is not exercised, Lehman Dairy expects to pay $15,000 under the guaranteed residual value. The lease contains no renewable options, and the equipment reverts to Chavez Finance Company upon termination of the lease, if the purchase option is not exercised. Lehman Dairy's incremental borrowing rate is 12% per year. Chavez's implicit rate is 10% and is known to Lehman Dairy. Collectability of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. Present value of 1 for 12 periods at 10% 0.31863 Present value of 1 for 12 periods at 12% 0.25668 Present value of an ordinary annuity for 12 periods at 10% 6.81369 Present value of an ordinary annuity for 12 periods at 12% 6.19437 Present value of an annuity due for 12 periods at 10% 7.49506 Present value of an annuity due for 12 periods at 12% 6.93770 Instructions (Assume the accounting period ends on December 31.) (a) Calculate the required payment Chavez Finance requires to earn the Fair Value of the asset, using the LESSEE'S Borrowing Rate? (b) Lehman Dairy is able to negotiate the payment down to $100,000 per year. Compute the present value of the minimum lease payments for both the lessee and lessor. (c) What type of lease is this for the lessor? For the lessee? Why? (d) Prepare the journal entries Chavez would make in 2025 related to the lease arrangement. (e) Prepare the journal entries Lehman would make in 2025 related to the lease arrangement. Lehman Dairy leases its milking equipment from Chavez Finance Company under the following lease terms. The lease term is 12 years, non-cancelable, and requires equal rental payments due at the beginning of each year starting January 1, 2024. The equipment has a fair value of $727,500, and cost Chavez $485,000, at the inception of the lease (January 1, 2024). Lehman Dairy has the option to purchase the equipment for $9,000. This represents a significant discount on the equipment. The estimated economic life of the equipment is 14 years, and a residual value (which is guaranteed by Lehman Dairy) of $20,000. If the purchase option is not exercised, Lehman Dairy expects to pay $15,000 under the guaranteed residual value. The lease contains no renewable options, and the equipment reverts to Chavez Finance Company upon termination of the lease, if the purchase option is not exercised. Lehman Dairy's incremental borrowing rate is 12% per year. Chavez's implicit rate is 10% and is known to Lehman Dairy. Collectability of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. Present value of 1 for 12 periods at 10% 0.31863 Present value of 1 for 12 periods at 12% 0.25668 Present value of an ordinary annuity for 12 periods at 10% 6.81369 Present value of an ordinary annuity for 12 periods at 12% 6.19437 Present value of an annuity due for 12 periods at 10% 7.49506 Present value of an annuity due for 12 periods at 12% 6.93770 Instructions (Assume the accounting period ends on December 31.) (a) Calculate the required payment Chavez Finance requires to earn the Fair Value of the asset, using the LESSEE'S Borrowing Rate? (b) Lehman Dairy is able to negotiate the payment down to $100,000 per year. Compute the present value of the minimum lease payments for both the lessee and lessor. (c) What type of lease is this for the lessor? For the lessee? Why? (d) Prepare the journal entries Chavez would make in 2025 related to the lease arrangement. (e) Prepare the journal entries Lehman would make in 2025 related to the lease arrangement.