On June 30, 2019, Jackson, Inc. leased a machine with a 5-year useful life from Compu Leasing Corporation. The lease agreement calls for Jackson to make semiannual lease payment over a four-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2019. Jackson’s incremental borrowing rate is 12%, and Compu’s implicit rate is 10% (unknown to Jackson). Compu depreciates their assets on a straight-line basis at the end of each fiscal year. Compu constructed the machine at a cost of $1,500,000. The fair value of the machine is $2 million, and Compu provided Jackson the option to purchase the machine at a discounted amount of $40,000 at the end of the lease. Both companies use a 31-Dec year end.

Instructions

For Compu Leasing Co.

a. What the of lease is this for Compu?

b. Calculate the annual lease payments required by Compu (given Large’s implicit rate of return) in order to recover the fair value of the machine.

C. Provided the journal entries through June 30, 2020

For Jackson, Inc

a. What type of lease is this Jackson?

B. Calculate the present value of else payments for Jackson

c. Provided the journal entries through June 30, 2020